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The Spirit of Capitalism and Expectation Driven Business Cycles

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  • Lilia Karnizova

    ()
    (Department of Economics, University of Ottawa)

Abstract

While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict an economic boom in consumption, investment, employment, output and the stock market in response to good news about future productivity. This paper proposes and evaluates a model with the intrinsic desire for wealth accumulation, or ‘the spirit of capitalism’ hypothesis, which generates the aforementioned responses. Restrictions for the existence of expectation driven business cycles are derived analytically. The restrictions are confirmed by an estimated version of the model. The proposed preference specification is supported with additional empirical evidence.

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Bibliographic Info

Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0804E.

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Length: 49 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:ott:wpaper:0804e

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Keywords: Spirit of Capitalism; News Shocks; Business Cycles;

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  1. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
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  3. Beaudry, Paul & Portier, Franck, 2005. "The "news view" of economic fluctuations: Evidence from aggregate Japanese data and sectoral US data," Journal of the Japanese and International Economies, Elsevier, vol. 19(4), pages 635-652, December.
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  7. Beaudry, Paul & Portier, Franck, 2007. "When can changes in expectations cause business cycle fluctuations in neo-classical settings?," Journal of Economic Theory, Elsevier, vol. 135(1), pages 458-477, July.
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  9. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 1-53, February.
  10. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  11. Johanna Francis, 2008. "Wealth and the Capitalist Spirit," Fordham Economics Discussion Paper Series, Fordham University, Department of Economics dp2008-10, Fordham University, Department of Economics.
  12. RUGE-MURCIA, Francisco J., 2003. "Methods to Estimate Dynamic Stochastic General Equilibrium Models," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-23, Universite de Montreal, Departement de sciences economiques.
  13. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  14. Boileau, Martin & Braeu, Rebecca, 2007. "The Spirit Of Capitalism, Asset Returns, And The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 11(02), pages 214-230, April.
  15. Grant McQueen, 2004. "Whence GARCH? A Preference-Based Explanation for Conditional Volatility," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 915-949.
  16. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
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