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Behavioral Theories of the Business Cycle

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  • Nir Jaimovich
  • Sergio Rebelo

Abstract

We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.

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File URL: http://www.nber.org/papers/w12570.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12570.

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Date of creation: Oct 2006
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Publication status: published as Nir Jaimovich & Sergio Rebelo, 2007. "Behavioral Theories of the Business Cycle," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 361-368, 04-05.
Handle: RePEc:nbr:nberwo:12570

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  1. Söderlind, Paul, 2005. "C-CAPM without Ex Post Data," SIFR Research Report Series 39, Institute for Financial Research.
  2. 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.
  3. Jonathan A. Parker & Markus K. Brunnermeier, 2004. "Optimal Expectations," Econometric Society 2004 North American Winter Meetings 426, Econometric Society.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  5. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  6. Jean-Pierre DANTHINE & John B. DONALDSON & Thore JOHNSEN, 1997. "Productivity Growth, Consumer Confidence and the Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9711, Université de Lausanne, Faculté des HEC, DEEP.
  7. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  8. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  9. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
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Cited by:
  1. Doshchyn, Artur & Giommetti, Nicola, 2013. "Learning, Expectations, and Endogenous Business Cycles," MPRA Paper 49617, University Library of Munich, Germany.
  2. Dmitriev, Mikhail, 2009. "Confidence of Agents and Market Frictions," MPRA Paper 21149, University Library of Munich, Germany.
  3. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," Working Paper 2012/12, Norges Bank.
  4. Kevin J. Lansing, 2008. "Speculative growth and overreaction to technology shocks," Working Paper Series 2008-08, Federal Reserve Bank of San Francisco.
  5. Carlos Garcia & Andrés Sagner, 2012. "Exceso de Toma de Riesgo Crediticio en Chile," ILADES-Georgetown University Working Papers inv280, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  6. Carlos J. García & Andrés Sagner, 2011. "Crédito, Exceso de toma de Riesgo, Costo de Crédito y ciclo Económico en Chile," Working Papers Central Bank of Chile 645, Central Bank of Chile.
  7. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series 2014-43, Board of Governors of the Federal Reserve System (U.S.).

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