A popular theory of business cycles is that they are driven by animal spirits: shifts in expectations brought on by sunspots. Two prominent examples are Diamond (JPE, 1982) and Howitt and McAfee (AER, 1992). We show that these models have unique equilibria if there are payoff shocks of any size. At critical junctures, a small negative shock can cause the economy to slide into a recession. Once this happens, a sustained sequence of positive shocks is needed to spark an expansion.
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Paper provided by Tel Aviv in its series Papers with number
2001-10.
Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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Jakub Steiner, 2005.
"Coordination Cycles,"
CERGE-EI Working Papers
wp274, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
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