Increasing returns, home production and persistence of business cycles

This paper presents a business cycle model with a propagation mechanism capable of generating persistence of output growth comparable to that observed in the US data. The key is that in this model consumption and labor move together not only at the impact of a shock, but also for a few periods after that; this can happen if there are sufficient increasing returns to make the equilibrium indeterminate. The exact degree of increasing returns is estimated so that the distance between the spectra of the model and US output growth is minimized.