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Growth Expectation

  • Ippei Fujiwara

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp))

For a long time, changes in expectations about the future have been thought to be significant sources of economic fluctuations, as argued by Pigou (1926). Although creating such an expectation-driven cycle (the Pigou cycle) in equilibrium business cycle models was considered to be a difficult challenge, as pointed out by Barro and King (1984), recently, several researchers have succeeded in producing the Pigou cycle by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Seminal research by Christiano, Ilut, Motto and Rostagno (2007) explains the gstock market boom-bust cycles,h characterized by increases in consumption, labor inputs, investment and the stock prices relating to high expected future technology levels, by introducing investment growth adjustment costs, habit formation in consumption, sticky prices and an inflation-targeting central bank. We, however, show that such a cycle is difficult to generate based on ggrowth expectation,h which reflect expectations of higher productivity growth rates. Thus, Barro and King's (1984) prediction still applies.

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File URL: http://www.imes.boj.or.jp/research/papers/english/08-E-21.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-21.

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Date of creation: Sep 2008
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Handle: RePEc:ime:imedps:08-e-21
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  1. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2004. "Learning and shifts in long-run productivity growth," Working Paper Series 2004-04, Federal Reserve Bank of San Francisco.
  2. KOBAYASHI Keiichiro & NAKAJIMA Tomoyuki & INABA Masaru, 2007. "Collateral Constraint and News-driven Cycles," Discussion papers 07013, Research Institute of Economy, Trade and Industry (RIETI).
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  4. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
  5. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  6. Ricardo Reis, 2004. "Inattentive Consumers," Working Papers 135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  7. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  8. Ippei Fujiwara & Heedon Kang, 2006. "Expectation Shock Simulation with DYNARE," QM&RBC Codes 163, Quantitative Macroeconomics & Real Business Cycles, revised Feb 2008.
  9. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 21-55, October.
  10. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," IMES Discussion Paper Series 08-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
  11. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
  12. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  13. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  14. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
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