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Animal Spirits as an Engine of Boom-Busts and Throttle of Productivity Growth

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Abstract

The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence,stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts as well as lower-frequency fluctuations.

Suggested Citation

  • Christopher M. Gunn, 2013. "Animal Spirits as an Engine of Boom-Busts and Throttle of Productivity Growth," Carleton Economic Papers 13-04, Carleton University, Department of Economics, revised 10 Apr 2015.
  • Handle: RePEc:car:carecp:13-04
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The productivity slump
      by chris dillow in Stumbling and Mumbling on 2014-06-11 18:00:20
    2. Newt troubles
      by chris in Stumbling and Mumbling on 2017-03-29 17:50:17
    3. Worker ownership: threat or promise?
      by chris in Stumbling and Mumbling on 2018-09-25 10:15:39

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    Cited by:

    1. Gunn, Christopher M. & Johri, Alok, 2018. "Financial News, Banks, And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(02), pages 173-198, March.
    2. Christoph Görtz & Christopher Gunn & Thomas Lubik, 2018. "Taking Stock of TFP News Shocks: The Inventory Comovement Puzzle," Carleton Economic Papers 18-05, Carleton University, Department of Economics, revised 14 Jul 2018.

    More about this item

    Keywords

    expectations-driven business cycle; sunspot; multiple equilibria; indeterminacy; animal spirits; technology; news shock; intangible capital; embodied; productivity; technological adoption;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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