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Shocks and Business Cycles

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  • Frankel, David M.
  • Burdzy, Krzysztof

Abstract

A popular theory of business cycles is that they are driven by animal spirits: shifts in expectations brought on by sunspots. A prominent example is Howitt and McAfee (AER, 1992). We show that this model has a unique equilibrium if there are payoff shocks of any size. This equilibrium still has the desirable property that recessions and expansions can occur without any large exogenous shocks. We give an algorithm for computing the equilibrium and study its comparative statics properties. This work generalizes Burdzy, Frankel, and Pauzner (2000) to the case of endogenous frictions and seasonal and mean-reverting shocks.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12274.

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Date of creation: 01 Jan 2005
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Publication status: Published in Advances in Theoretical Economics 2005, vol. 5 no. 1
Handle: RePEc:isu:genres:12274

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Cited by:
  1. Jakub Steiner, 2005. "Coordination Cycles," CERGE-EI Working Papers wp274, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. David M. Frankel, 2010. "Rent Seeking and Economic Fragility," Levine's Bibliography 661465000000000159, UCLA Department of Economics.
  3. Levin Jonathan, 2009. "The Dynamics of Collective Reputation," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 9(1), pages 1-25, August.
  4. Frankel, David M., 2012. "Recurrent crises in global games," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 309-321.
  5. Frankel, David M., 2010. "Shocks and Crises in the Long Run," Staff General Research Papers, Iowa State University, Department of Economics 31687, Iowa State University, Department of Economics.
  6. Daisuke Oyama, 2004. "Booms And Slumps In A Game Of Sequential Investment With The Changing Fundamentals," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 55(3), pages 311-320.

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