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

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.

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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 13-04.

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Length: 42 pages
Date of creation: Jun 2013
Date of revision: 10 Apr 2015
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:13-04
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