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Learning and Asymmetric Business Cycles

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  • Martin Chalkley

    (Department of Economics, University of Southampton)

  • In Ho Lee

    (Department of Economics, University of Southampton)

Abstract

It is known that a variety of economic time series exhibit asymmetry in the sense that the arrival of a recession is prompt, while the recovery from a recession appears protracted. This paper provides an explanation for the asymmetric movement of economic time series over business cycles by considering learning and information aggregation, given risk aversion on the part of economic agents. A model is constructed in which the underlying state of nature changes according to a symmetric first-order Markov process. Risk-averse agents make capital utilization choices which partially reveal their private information on the underlying state of nature. Risk aversion prevents them from acting promptly on receiving good news, while it encourages them to act quickly on receiving bad news. When this cautious response at the individual level is combined with aggregate noise, an economy-wide asymmetric time series is generated. A numerical simulation is carried out to derive the empirical distribution of movements of such a time series. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0024
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 1 (1998)
Issue (Month): 3 (July)
Pages: 623-645

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Handle: RePEc:red:issued:v:1:y:1998:i:3:p:623-645

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  1. Scott, A. & Acemoglu, D., 1995. "Asymmetric Business Cycles: Theory and Time-series Evidence," Economics Series Working Papers 99173, University of Oxford, Department of Economics.
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  13. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  14. Falk, Barry L., 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Staff General Research Papers 11097, Iowa State University, Department of Economics.
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