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News and knowledge capital

Author

Listed:
  • Christopher Gunn

    (McMaster University)

  • Alok Johri

    (McMaster University)

Abstract

We show that a model with knowledge capital can generate business cycles driven by expectations of future movement in total factor productivity (TFP). These cycles are characterized by a boom in which consumption, investment, output and hours-worked all rise in advance of any movement in TFP. We model knowledge capital as an input into production which is endogenously produced through a learning-by-doing process. When firms receive news of an impending productivity increase, the value of knowledge capital rises, inducing the firm to hire more hours to "invest" in knowledge capital. The rise in the value of knowledge capital immediately raises the value of the firm, causing an appreciation in share prices, a feature that has empirical support. The increase in output of the firm allows both consumption and investment to rise despite the absence of any contemporaneous productivity shock. If the expected increase in productivity fails to materialize, the model generates a recession as well as a crash in the stock market. (Copyright: Elsevier)

Suggested Citation

  • Christopher Gunn & Alok Johri, 2011. "News and knowledge capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 92-101, January.
  • Handle: RePEc:red:issued:09-256
    DOI: 10.1016/j.red.2010.07.003
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    More about this item

    Keywords

    Expectations-driven business cycles; News shocks; Learning-by-doing; Asset pricing;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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