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Aggregate Comovements, Anticipation, and Business Cycles

  • David R.F. Love


    (Department of Economics, Brock University)

This paper points out that negative comovements between macroeconomic aggregates are commonly observed in US data and that this is not explained by conventional business cycle models which emphasize positive comovements only. We discuss how these facts can be readily explained in simple Neoclassical models by the dynamic responses to signals (news) about future economic fundamentals unrelated to current fundamentals. These "anticipation effects" are contrasted with the effects of immediate shocks to current fundamentals which are the main source of fluctuations in standard RBC models. Simulation results illustrate that the enriche model dynamics under the anticipation assumption can replicate both the positive and negative comovements observed in the data and magnifies the effects of shocks, without negative implications for the model's predictions regarding other moments.

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Paper provided by Brock University, Department of Economics in its series Working Papers with number 0704.

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Length: 35 pages
Date of creation: Jun 2007
Date of revision: Jun 2007
Handle: RePEc:brk:wpaper:0704
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  1. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  2. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  3. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  5. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  6. Gagnon, Joseph E, 1990. "Solving the Stochastic Growth Model by Deterministic Extended Path," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 35-36, January.
  7. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  8. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  9. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  10. Paul Beaudry & Franck Portier, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," NBER Working Papers 10776, National Bureau of Economic Research, Inc.
  11. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  12. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. David R.F. Love, 2009. "Aggregate Comovements, Anticipation, and Business Cycles," Working Papers 0908, Brock University, Department of Economics.
  15. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
  16. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  17. David R.F. Love & Jean-Francois Lamarche, 2004. "Anticipation and Real Business Cycles," Working Papers 0703, Brock University, Department of Economics, revised Sep 2007.
  18. Cogley, Timothy & Nason, James M., 1993. "Impulse dynamics and propagation mechanisms in a real business cycle model," Economics Letters, Elsevier, vol. 43(1), pages 77-81.
  19. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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