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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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12274.
Length: Date of creation: 08 Apr 2005 Date of revision: Publication status: Published in Advances in Theoretical Economics, 2005, Vol. 5, No. 1, pp. paper no. 2. Handle: RePEc:isu:genres:12274
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Find related papers by JEL classification: C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and 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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