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News and knowledge capital

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Author Info

  • Christopher Gunn

    (McMaster University)

  • Alok Johri

    (McMaster University)

Abstract

We show that a model with knowledge capital can generate business cycles driven by expectations of future movement in total factor productivity (TFP). These cycles are characterized by a boom in which consumption, investment, output and hours-worked all rise in advance of any movement in TFP. We model knowledge capital as an input into production which is endogenously produced through a learning-by-doing process. When firms receive news of an impending productivity increase, the value of knowledge capital rises, inducing the firm to hire more hours to "invest" in knowledge capital. The rise in the value of knowledge capital immediately raises the value of the firm, causing an appreciation in share prices, a feature that has empirical support. The increase in output of the firm allows both consumption and investment to rise despite the absence of any contemporaneous productivity shock. If the expected increase in productivity fails to materialize, the model generates a recession as well as a crash in the stock market. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.07.003
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 1 (January)
Pages: 92-101

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Handle: RePEc:red:issued:09-256

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Related research

Keywords: Expectations-driven business cycles; News shocks; Learning-by-doing; Asset pricing;

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References

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  1. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
  2. Lawrence Christiano & Cosmin Ilut & Roberto Motto & Massimo Rostagno, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 955, European Central Bank.
  3. Christopher M. Gunn & Alok Johri, 2009. "News and knowledge capital," Department of Economics Working Papers 2009-02, McMaster University.
  4. Johri, Alok & Lahiri, Amartya, 2008. "Persistent real exchange rates," Journal of International Economics, Elsevier, vol. 76(2), pages 223-236, December.
  5. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  6. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and Measuring Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1026-1053, October.
  7. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  8. Yongsung Chang & Joao Gomes & Frank Schorfheide, 2002. "Learning by Doing as a Propagation Mechanism," Macroeconomics 0204002, EconWPA.
  9. Cooper, Russell & Johri, Alok, 2002. "Learning-by-doing and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1539-1566, November.
  10. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
  11. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  12. Alok Johri, Marc-André Letendre, 2006. "What do “residuals” from first-order conditions reveal about DGE models?," Department of Economics Working Papers 2006-01, McMaster University.
  13. Clarke, Andrew J., 2006. "Learning-by-doing and aggregate fluctuations: Does the form of the accumulation technology matter?," Economics Letters, Elsevier, vol. 92(3), pages 434-439, September.
  14. Robert J. Barro & Robert G. King, 1985. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
  15. Alok Johri, 2007. "Delivering Endogenous Inertia in Prices and Output," Department of Economics Working Papers 2007-04, McMaster University.
  16. Den Haan, Wouter & Kaltenbrunner, Georg, 2007. "Anticipated Growth and Business Cycles in Matching Models," CEPR Discussion Papers 6063, C.E.P.R. Discussion Papers.
  17. Diego A. Comin & Mark Gertler & Ana Maria Santacreu, 2009. "Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations," NBER Working Papers 15029, National Bureau of Economic Research, Inc.
  18. Ronald S. Jarmin, 1994. "Learning by Doing and Competition in the Early Rayon Industry," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 441-454, Autumn.
  19. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, vol. 90(4), pages 1034-1054, September.
  20. Paul Beaudry & Bernd Lucke, 2010. "Letting Different Views about Business Cycles Compete," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 413-455 National Bureau of Economic Research, Inc.
  21. Irwin, Douglas A & Klenow, Peter J, 1994. "Learning-by-Doing Spillovers in the Semiconductor Industry," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1200-1227, December.
  22. Alok Johri, 2009. "Online Appendix to "Delivering endogenous inertia in prices and output"," Technical Appendices 07-131, Review of Economic Dynamics.
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Citations

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Cited by:
  1. Görtz, Christoph & Tsoukalas, John D., 2012. "News and Financial Intermediation in Aggregate and Sectoral Fluctuations," Dynare Working Papers 12, CEPREMAP.
  2. Saif Mehkari & Bill Dupor, 2010. "Solving the Procyclical News Shock Problem," 2010 Meeting Papers 400, Society for Economic Dynamics.
  3. Ryo Jinnai, 2011. "News Shocks, Price Levels, and Monetary Policy," Global COE Hi-Stat Discussion Paper Series gd10-173, Institute of Economic Research, Hitotsubashi University.
  4. Xu, Zhiwei & Fan, Haichao, 2010. "Firm Dynamics in News Driven Business Cycle: The Role of Endogenous Survival Rate," MPRA Paper 30203, University Library of Munich, Germany, revised Feb 2011.
  5. Alok Johri & Marc-Andre Letendre & Daqing Luo, 2010. "Organizational Capital and the International Co-movement of Investment," Department of Economics Working Papers 2010-05, McMaster University.
  6. Alok Johri & Christopher Gunn, 2009. "News and knowledge capital," 2009 Meeting Papers 763, Society for Economic Dynamics.
  7. Christoph Gortz & John D. Tsoukalas, . "Learning, Capital Embodied Technology and Aggregate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  8. Hammad Qureshi, 2009. "News Shocks and Learning-by-doing," Working Papers 09-06, Ohio State University, Department of Economics.
  9. Alok Johri & Bidyut Kumar Talukdar, 2011. "Organizational Capital and Optimal Ramsey Taxation," Department of Economics Working Papers 2011-09, McMaster University.
  10. Jang-Ting Guo & Anca-Ioana Sirbu & Mark Weder, 2012. "News about Aggregate Demand and the Business Cycle," School of Economics Working Papers 2012-01, University of Adelaide, School of Economics.
  11. Christopher M. Gunn & Alok Johri, 2012. "News, Credit Spreads and Default Costs: An expectations-driven interpretation of the recent boom-bust cycle in the U.S," Department of Economics Working Papers 2012-04, McMaster University.

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