Social and Behavioral Sciences Commons^™

Business Cycle During Structural Change: Arthur Lewis' Theory From A Neoclassical Perspective, Kjetil Storesletten, Bo Zhao, Fabrizio Zilibotti

Cowles Foundation Discussion Papers

We document that the nature of business cycles evolves over the process of development and structural change. In countries with large declining agricultural sectors, aggregate employment is uncorrelated with GDP. During booms, employment in agriculture declines while labor productivity increases in agriculture more than in other sectors. We construct a unified theory of business cycles and structural change consistent with the stylized facts. The focal point of the theory is the simultaneous decline and modernization of agriculture. As capital accumulates, agriculture becomes increasingly capital intensive as modern agriculture crowds out traditional agriculture. Structural change accelerates in booms and slows down …