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Shocks and Business Cycles

Author

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  • Frankel David M

    () (Iowa State University)

  • Burdzy Krzysztof

    () (University of Washington)

Abstract

A popular theory of business cycles is that they are driven by animal spirits: shifts in expectations brought on by sunspots. A prominent example is Howitt and McAfee (AER, 1992). We show that this model has a unique equilibrium if there are payoff shocks of any size. This equilibrium still has the desirable property that recessions and expansions can occur without any large exogenous shocks. We give an algorithm for computing the equilibrium and study its comparative statics properties. This work generalizes Burdzy, Frankel, and Pauzner (2000) to the case of endogenous frictions and seasonal and mean-reverting shocks.

Suggested Citation

  • Frankel David M & Burdzy Krzysztof, 2005. "Shocks and Business Cycles," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-88, March.
  • Handle: RePEc:bpj:bejtec:v:advances.5:y:2005:i:1:n:2
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    References listed on IDEAS

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    1. Amartya Sen, 1996. "Maximization and the Act of Choice," Harvard Institute of Economic Research Working Papers 1766, Harvard - Institute of Economic Research.
    2. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. "Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-120, September.
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    5. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
    6. Slovic, Paul & Finucane, Melissa & Peters, Ellen & MacGregor, Donald G., 2002. "Rational actors or rational fools: implications of the affect heuristic for behavioral economics," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 31(4), pages 329-342.
    7. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
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    Cited by:

    1. Frankel, David M., 2012. "Recurrent crises in global games," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 309-321.
    2. repec:eee:mateco:v:73:y:2017:i:c:p:13-33 is not listed on IDEAS
    3. Steiner, Jakub, 2008. "Coordination cycles," Games and Economic Behavior, Elsevier, pages 308-327.
    4. Luis Araujo & Bernardo Guimaraes, 2017. "A Coordination Approach to the Essentiality of Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, pages 14-24.
    5. Guimarães, Bernardo de Vasconcellos & Machado, Caio Henrique & Pereira, Ana Elisa Gonçalves, 2017. "Dynamic coordination with timing frictions: theory and applications," Textos para discussão 461, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    6. Guimaraes, Bernardo & Pereira, Ana Elisa, 2016. "QWERTY is efficient," Journal of Economic Theory, Elsevier, vol. 163(C), pages 819-825.
    7. repec:eee:macchp:v2-1065 is not listed on IDEAS

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