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Communication frictions, sentiments, and nonlinear business cycles

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  • Libo Xu
  • Apostolos Serletis

Abstract

In the context of a rational expectations macroeconomic model with communication frictions, we show that the level of economic activity is a nonlinear and time‐varying function of aggregate economic fundamentals and sentiment shocks. In particular, because of communication frictions, it is possible for small changes in sentiment shocks to cause large changes in aggregate output, and, similarly, for large changes in sentiment shocks to cause small changes in aggregate output. We also find that communication frictions have nonlinear effects on the variance of aggregate output, meaning that improving the communication does not always reduce the variance of aggregate output.

Suggested Citation

  • Libo Xu & Apostolos Serletis, 2019. "Communication frictions, sentiments, and nonlinear business cycles," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(2), pages 137-152, June.
    • Handle: RePEc:bla:ijethy:v:15:y:2019:i:2:p:137-152
    DOI: 10.1111/ijet.12163
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