Business cycles fluctuations in three-sector intertemporal equilibrium models

Abstract

This paper introduces a novel mechanism driving endogenous business cycle fluctuations within a frictionless three-sector intertemporal equilibrium model. We emphasize the critical role of consumer preferences as a primary driver of cyclical dynamics by considering a consumption bundle composed of a pure consumption good and a mixed consumption-investment good that simultaneously serves as both a final consumption good and a capital-accumulating investment good. Endogenous fluctuations naturally arise from sectoral capital intensity differences, an intertemporal consumption trade-off between the two goods, or the interaction of both mechanisms. We offer a detailed characterization of the economy's dynamics, identifying the Hopf bifurcation conditions that trigger persistent cyclical behavior. Additionally, we explore the periodicity of the resulting limit cycles, providing insights into how shifts in preferences and sectoral complementarities can generate self-sustained macroeconomic fluctuations.