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Regime-switching in expectations over the business cycle

  • Gwen Eudey
  • Roberto Perli

In this paper the authors argue that a plausible reason why output and other major U.S. macroeconomic time series seem to follow a Markov switching process might be strictly related to expectations. The authors show that a time series of expectations of future output from the Survey of Professional Forecasters is the only one among the many they analyze that has switching properties compatible with those of output. Starting from this empirical evidence the authors present a business cycle model with shocks to expectations (sunspots) that produces time series with the same properties as the U.S. data.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 99-17.

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Date of creation: 1999
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Handle: RePEc:fip:fedpwp:99-17
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  1. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  2. Roberto Perli, 1995. "Indeterminacy, Home Production, and the Business Cycle: a Calibrated Analysis," Home Pages _042, University of Pennsylvania.
  3. Diebold, Francis X & Rudebusch, Glenn D, 1989. "Scoring the Leading Indicators," The Journal of Business, University of Chicago Press, vol. 62(3), pages 369-91, July.
  4. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
  5. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  6. Andrew J. Filardo, 1993. "Business cycle phases and their transitional dynamics," Research Working Paper 93-14, Federal Reserve Bank of Kansas City.
  7. Ellen McGrattan & Richard Rogerson & Randall Wright, 1993. "Household production and taxation in the stochastic growth model," Staff Report 166, Federal Reserve Bank of Minneapolis.
  8. Finn E. Kydland & Edward C. Prescott, 1994. "The computational experiment: an econometric tool," Staff Report 178, Federal Reserve Bank of Minneapolis.
  9. John G. Matsusaka & Argia M. Sbordone, 1993. "Consumer confidence and economic fluctuations," Working Paper Series, Macroeconomic Issues 93-13, Federal Reserve Bank of Chicago.
  10. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  11. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  12. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  13. Perli, Roberto, 1998. "Increasing returns, home production and persistence of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 519-543, April.
  14. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycle," RCER Working Papers 268, University of Rochester - Center for Economic Research (RCER).
  15. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
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