When can changes in expectations cause business cycle fluctuations in neo-classical settings?
AbstractIt is often argued that changes in expectation are an important driving force of the business cycle. However, it is well known that changes in expectations cannot generate positive co-movement between consumption, investment and employment in the most standard neo-classical business cycle models. This gives rise to the question of whether changes in expectation can cause business cycle fluctuations in neo-classical setting or whether such a phenomenon is inherently related to market imperfections. This paper offers a systematic exploration of this issue. Our finding is that expectation driven business cycle fluctuation can arise in neo-classical models when one allows for a sufficient rich description of the inter-sectorial production technology, however such a structure is rarely allowed in macro-models. In particular, the key characteristic which we isolate as giving rise to the possibility of Expectation Driven Business Cycles is that intermediate good producers exhibit cost complementarities (i.e., economies of scope) when supplying intermediate goods to different sectors of the economy.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 135 (2007)
Issue (Month): 1 (July)
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Web page: http://www.elsevier.com/locate/inca/622869
Other versions of this item:
- Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," IDEI Working Papers 304, Institut d'Économie Industrielle (IDEI), Toulouse.
- Paul Beaudry & Franck Portier, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," NBER Working Papers 10776, National Bureau of Economic Research, Inc.
- Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," CEPR Discussion Papers 4628, C.E.P.R. Discussion Papers.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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