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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 fluctuations. The addition of countercyclical markups and modest investment adjustment costs offers an easy fix to this conundrum. The simulated model generates quantitatively realistic business cycles with news shocks accounting for over half of the variance of technology shocks.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2012-02.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2012-02.

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Length: 27 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:adl:wpaper:2012-02
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Web page: http://www.economics.adelaide.edu.au/

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