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News Driven Business Cycles in Heterogenous Agents Economies

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  • FRanck Portier

    (Toulouse School of Economics)

  • Paul Beaudry

    (University of British Columbia)

Abstract

We present a new propagation mechanism for news shocks in dynamic general equilibrium models. The existing literature has considered representative agents models, in which news shock impact the economy through intertemporal substitution mechanisms. We consider different setups with heterogenous agents. We show that news-driven business cycles are possible in such environments, because such news create new current opportunities to trade between agents. In those environments, a Social Planner that would maximize a weighted sum of the different agents intertemporal utilities would choose allocations in which investment, consumption and hours are not all procyclical. In contrast, competitive allocations are displaying a business cycle pattern.

Suggested Citation

  • FRanck Portier & Paul Beaudry, 2009. "News Driven Business Cycles in Heterogenous Agents Economies," 2009 Meeting Papers 984, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:984
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