News shocks and business cycles
This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables—consumption, investment, and employment—to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.
Volume (Year): (2010)
Issue (Month): 4Q ()
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- Beaudry, Paul & Portier, Franck, 2004.
"When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?,"
IDEI Working Papers
304, Institut d'Économie Industrielle (IDEI), Toulouse.
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- Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
- Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005.
"A, B, C’s (And D’s) For Understanding VARS,"
PIER Working Paper Archive
05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez & Thomas J. Sargent, 2005. "A, B, C’s, (and D’s) for understanding VARs," FRB Atlanta Working Paper 2005-09, Federal Reserve Bank of Atlanta.
- Jesus Fernandez-Villaverde & Juan Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C's (and D)'s for Understanding VARs," NBER Technical Working Papers 0308, National Bureau of Economic Research, Inc.
- Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 172782000000000096, UCLA Department of Economics.
- Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent & Mark Watson, 2006. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 321307000000000646, UCLA Department of Economics.
- Martin Floden, 2007.
"Vintage Capital and Expectations Driven Business Cycles,"
2007 Meeting Papers
329, Society for Economic Dynamics.
- Floden, Martin, 2006. "Vintage Capital and Expectations Driven Business Cycles," SSE/EFI Working Paper Series in Economics and Finance 643, Stockholm School of Economics.
- Flodén, Martin, 2007. "Vintage Capital and Expectations Driven Business Cycles," CEPR Discussion Papers 6113, C.E.P.R. Discussion Papers.
- Walentin, Karl, 2009.
"Expectation Driven Business Cycles with Limited Enforcement,"
Working Paper Series
229, Sveriges Riksbank (Central Bank of Sweden), revised 01 Oct 2011.
- Walentin, Karl, 2014. "Expectation driven business cycles with limited enforcement," Economics Letters, Elsevier, vol. 124(2), pages 300-303.
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