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Animal spirits as an engine of boom-busts and throttle of productivity growth

Listed author(s):
  • Gunn, Christopher M.

The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence, stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts and lower-frequency fluctuations. Finally, estimating a Beaudry–Portier style VECM on the simulated model output to identify a “news shock” recovers impulse response functions largely consistent with the Beaudry and Portier (2006) results.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 57 (2015)
Issue (Month): C ()
Pages: 24-53

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Handle: RePEc:eee:dyncon:v:57:y:2015:i:c:p:24-53
DOI: 10.1016/j.jedc.2015.05.001
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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