News Shocks and Learning-by-doing
AbstractThe idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD.
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Bibliographic InfoPaper provided by Ohio State University, Department of Economics in its series Working Papers with number 09-06.
Length: 31 pages
Date of creation: Jun 2009
Date of revision:
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News Shocks; Learning-by-Doing; Pigou Cycles;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-11 (All new papers)
- NEP-BEC-2009-07-11 (Business Economics)
- NEP-CBA-2009-07-11 (Central Banking)
- NEP-DGE-2009-07-11 (Dynamic General Equilibrium)
- NEP-MAC-2009-07-11 (Macroeconomics)
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