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Anticipation and Real Business Cycles

  • David R.F. Love

    ()

    (Department of Economics, Brock University)

  • Jean-Francois Lamarche

    ()

    (Department of Economics, Brock University)

Standard real business cycle (RBC) theory assumes that changes in economic conditions are unanticipated. We argue that upcoming changes are often well anticipated. Employing the RBC methodology to evaluate models when changes in economic conditions are fully anticipated provides evidence on the relevance of this alternative. We find that anticipation effects i) reduce the exogenous volatility required for the models to explain output folatility, ii) improves or leaves unchanged, the model predictions for the data moments studied and, iii) can go some way to providing realistic internal propagation mechanisms within theoretical frameworks.

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File URL: ftp://coffee.econ.brocku.ca/RePec/pdf/0703.pdf
File Function: First version, Nov. 2004
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Paper provided by Brock University, Department of Economics in its series Working Papers with number 0703.

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Length: 38 pages
Date of creation: Sep 2004
Date of revision: Sep 2007
Handle: RePEc:brk:wpaper:0703
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