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Countercyclical Markups and News-Driven Business Cycles

  • Oscar Pavlov

    (School of Economics, University of Adelaide)

  • Mark Weder

    ()

    (School of Economics, University of Adelaide)

The standard one-sector real business cycle model is unable to generate expectations-driven business cycles. The current paper shows that this conundrum can be solved by adding countercyclical markups and modest capital adjustment costs.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2011-28.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2011-28.

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Length: 16 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:adl:wpaper:2011-28
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Web page: http://www.economics.adelaide.edu.au/

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  1. Oscar Pavlov & Mark Weder, 2011. "Variety Matters," School of Economics Working Papers 2011-23, University of Adelaide, School of Economics.
  2. 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.
  3. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  4. Cosmin L. Ilut & Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2010. "Monetary Policy and Stock Market Booms," Working Papers 10-69, Duke University, Department of Economics.
  5. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  6. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  8. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
  9. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1238-1252, October.
  10. Jang-Ting Guo & Anca-Ioana Sirbu & Richard M. H. Suen, 2010. "On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment," Working Papers 201009, University of California at Riverside, Department of Economics, revised Sep 2010.
  11. Stephanie Schmitt-Grohe, 1995. "Comparing four models of aggregate fluctuations due to self-fulfilling expectations," Finance and Economics Discussion Series 95-17, Board of Governors of the Federal Reserve System (U.S.).
  12. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  13. Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
  14. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  15. Pengfei Wang, 2012. "Understanding Expectation‐Driven Fluctuations: A Labor‐Market Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 487-506, 03.
  16. Robert J. Barro & Robert G. King, 1982. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
  17. Stefano Eusepi & Bruce Preston, 2009. "Labor supply heterogeneity and macroeconomic comovement," Staff Reports 399, Federal Reserve Bank of New York.
  18. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 299-316, June.
  19. Jordi Galí, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  20. Stefano Eusepi*, 2009. "On expectations-driven business cycles in economies with production externalities," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 9-23.
  21. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Chapters, in: Enhancing Productivity (NBER-CEPR-TCER-Keio conference) National Bureau of Economic Research, Inc.
  22. Guido W. Imbens & Donald B. Rubin & Bruce I. Sacerdote, 2001. "Estimating the Effect of Unearned Income on Labor Earnings, Savings, and Consumption: Evidence from a Survey of Lottery Players," American Economic Review, American Economic Association, vol. 91(4), pages 778-794, September.
  23. Karnizova, Lilia, 2010. "The spirit of capitalism and expectation-driven business cycles," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 739-752, September.
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