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Explaining speculative expansions

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Author Info
Xiao, Wei (University of New Orleans)

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Abstract

In this paper we use a modified neoclassical business cycle model to test two competing explanations of the expansion of the 1990s. The model can have indeterminate, multiple equilibria that give rise to expectation-driven business cycles. We fit into the model series of estimated speculative and productivity shocks and compare its predictions with empirical data. Our results suggest that the speculation hypothesis has more explanatory power than the productivity hypothesis in terms of matching the data. Speculative behavior of investors, therefore, may have contributed to the investment boom, the prolonged expansion, and the subsequent recession of the period 1991-2001.

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Publisher Info
Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2003-02.

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Length: 39 pages
Date of creation: 16 Jun 2003
Date of revision:
Handle: RePEc:uno:wpaper:2003-02

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Postal: New Orleans, Louisiana 70148
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Related research
Keywords: Neoclassical Business Cycle Speculative Behavior Productivity Shocks

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Find related papers by JEL classification:
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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    Other versions:
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  4. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier. [Downloadable!] (restricted)
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    Other versions:
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  17. Burnside, A. Craig & Eichenbaum, Martin S. & Rebelo, Sergio T., 1996. "Sectoral Solow residuals," European Economic Review, Elsevier, vol. 40(3-5), pages 861-869, April. [Downloadable!] (restricted)
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  18. Peter N. Ireland, 1999. "A method for taking models to the data," Working Paper 9903, Federal Reserve Bank of Cleveland. [Downloadable!]
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