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Near-Future Expectations, Intertemporal Substitution, and Business Cycles

  • Toshiya Ishikawa

    (Kyushu Kyoritsu University)

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    This paper incorporates expectations of near-future business cycles in a real business cycle model. The model has random walk technology shocks and endogenous fluctuations in labor effort. Perfect foresight is assumed, that is, economic agents can foresee near-future technology shocks before they occur. Major findings are as follows. (1) When positive (or negative) technology shocks are expected in the near future, intertemporal substitution behavior leads to recessions (or expansions) at present. (2) A smaller size of technology shocks can generate the realistic volatility of business cycles when they can be forecast than otherwise. (3) Most part of fluctuations in the Solow residual are explained by variations in labor effort, and not by technology shocks.

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    Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number 4B.3.

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    Date of creation: 04 Jan 2001
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    Handle: RePEc:ams:cdws01:4b.3
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