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Shocks and Business Cycles

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  • Frankel, D.M.

Abstract

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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Bibliographic Info

Paper provided by Tel Aviv in its series Papers with number 2001-10.

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Length: 20 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:fth:teavfo:2001-10

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Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.
Phone: 972-3-640-9255
Fax: 972-3-640-5815
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Web page: http://econ.tau.ac.il/research/foerder.asp
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Keywords: GAMES ; FLUCTUATIONS ; BUSINESS CYCLES;

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Cited by:
  1. Daisuke Oyama, 2004. "Booms And Slumps In A Game Of Sequential Investment With The Changing Fundamentals," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 311-320.
  2. Frankel, David M., 2010. "Shocks and Crises in the Long Run," Staff General Research Papers 31687, Iowa State University, Department of Economics.
  3. Frankel, David M., 2012. "Recurrent crises in global games," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 309-321.
  4. Steiner, Jakub, 2008. "Coordination cycles," Games and Economic Behavior, Elsevier, vol. 63(1), pages 308-327, May.
  5. David M. Frankel, 2010. "Rent Seeking and Economic Fragility," Levine's Bibliography 661465000000000159, UCLA Department of Economics.
  6. Levin Jonathan, 2009. "The Dynamics of Collective Reputation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, August.

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