News about the future and economic fluctuations
In the late 1990s, as tech-stock prices were surging, we often heard discussion about a "new economy" in which advanced communications technologies would lead to higher future productivity growth and greater economic efficiency. But the boom times largely came to a halt after August 2000, and in March 2001, the economy entered a recession that lasted eight months. Economist A.C. Pigou argued that news about the future or changes in expectations are important drivers of the business cycle. His theory seems to offer a plausible explanation of what happens in boom-bust cycles. But is his theory consistent with how modern macroeconomic models account for business cycles? In this article, Keith Sill investigates some of the empirical evidence for the economic importance of news shocks, discusses the failings of the standard macroeconomic model in accounting for the role of news in business cycles, and touches on what the news view of business cycles means for the conduct of monetary policy.
Volume (Year): (2009)
Issue (Month): Q4 ()
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