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Aggregate Comovements, Anticipation, and Business Cycles

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  • David R.F. Love

    ()
    (Department of Economics, Brock University)

Abstract

This paper points out that negative comovements between macroeconomic aggregates are commonly observed in US data and that this is not explained by conventional business cycle models which emphasize positive comovements only. We discuss how these facts can be readily explained in simple Neoclassical models by the dynamic responses to signals (news) about future economic fundamentals unrelated to current fundamentals. These "anticipation effects" are contrasted with the effects of immediate shocks to current fundamentals which are the main source of fluctuations in standard RBC models. Simulation results illustrate that the enriche model dynamics under the anticipation assumption can replicate both the positive and negative comovements observed in the data and magnifies the effects of shocks, without negative implications for the model's predictions regarding other moments.

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0704.pdf
File Function: First version, June 2007
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Bibliographic Info

Paper provided by Brock University, Department of Economics in its series Working Papers with number 0704.

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Length: 35 pages
Date of creation: Jun 2007
Date of revision: Jun 2007
Handle: RePEc:brk:wpaper:0704

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Related research

Keywords: Comovements; Anticipation; News; Real Business Cycles; Equilibrium Dynamics;

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References

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  1. 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.
  2. David R.F. Love, 2009. "Aggregate Comovements, Anticipation, and Business Cycles," Working Papers 0908, Brock University, Department of Economics.
  3. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  4. Olivier Jean Blanchard & Danny Quah, 1990. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  6. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  7. Cogley, Timothy & Nason, James M., 1993. "Impulse dynamics and propagation mechanisms in a real business cycle model," Economics Letters, Elsevier, vol. 43(1), pages 77-81.
  8. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  10. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
  11. David R.F. Love & Jean-Francois Lamarche, 2004. "Anticipation and Real Business Cycles," Working Papers 0703, Brock University, Department of Economics, revised Sep 2007.
  12. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  13. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  14. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  15. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," IDEI Working Papers 158, Institut d'Économie Industrielle (IDEI), Toulouse.
  16. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
  17. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
  18. Gagnon, Joseph E, 1990. "Solving the Stochastic Growth Model by Deterministic Extended Path," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 35-36, January.
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Cited by:
  1. David R.F. Love, 2007. "Aggregate Comovements, Anticipation, and Business Cycles," Working Papers 0704, Brock University, Department of Economics, revised Jun 2007.

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