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News shocks and business cycles

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Author Info

  • Per Krusell
  • Alisdar McKay

Abstract

This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables—consumption, investment, and employment—to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.

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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

Volume (Year): (2010)
Issue (Month): 4Q ()
Pages: 373-397

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Handle: RePEc:fip:fedreq:y:2010:i:4q:p:373-397:n:v.96no.4

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Related research

Keywords: Business cycles ; Economic growth;

References

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  1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  2. 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.
  3. Per Krusell & Alisdar McKay, 2010. "News shocks and business cycles," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 373-397.
  4. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 172782000000000096, UCLA Department of Economics.
  5. Walentin, Karl, 2009. "Expectation Driven Business Cycles with Limited Enforcement," Working Paper Series 229, Sveriges Riksbank (Central Bank of Sweden), revised 01 Oct 2011.
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Cited by:
  1. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  2. Paul Beaudry & Franck Portier, 2013. "News Driven Business Cycles: Insights and Challenges," NBER Working Papers 19411, National Bureau of Economic Research, Inc.
  3. Per Krusell & Alisdar McKay, 2010. "News shocks and business cycles," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 373-397.

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