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News and knowledge capital

Listed author(s):
  • Christopher M. Gunn
  • Alok Johri

We explore the ability of a model with knowledge capital to generate business cycles driven by expectations of future movement in total factor productivity (TFP). These cycles are characterized by a boom in which consumption, investment, output and hours-worked all rise in advance of any actual movement in TFP. We model knowledge capital as an input into production which is endogenously produced through a learning-by-doing process. When firms receive news of an impending productivity increase, the value of knowledge capital rises, inducing the firm to hire more hours to "invest" in knowledge capital. The rise in the value of knowledge capital immediately raises the value of the firm, causing an appreciation in share prices, a feature that has empirical support. The increase in output of the firm allows both consumption and investment to rise despite the absence of any contemporaneous productivity shock. If the expected increase in productivity fails to materialize, the model generates a recession as well as a crash in the stock market.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2009-02.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2009-02.

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Length: 40 pages
Date of creation: Feb 2009
Handle: RePEc:mcm:deptwp:2009-02
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  2. Clarke, Andrew J., 2006. "Learning-by-doing and aggregate fluctuations: Does the form of the accumulation technology matter?," Economics Letters, Elsevier, vol. 92(3), pages 434-439, September.
  3. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Chapters, in: Enhancing Productivity (NBER-CEPR-TCER-Keio conference) National Bureau of Economic Research, Inc.
  4. Christopher M. Gunn & Alok Johri, 2009. "News and knowledge capital," Department of Economics Working Papers 2009-02, McMaster University.
  5. Russell Cooper & Alok Johri, 1999. "Learning by Doing and Aggregate Fluctuations," NBER Working Papers 6898, National Bureau of Economic Research, Inc.
  6. Yongsung Chang & Joao F. Gomes & Frank Schorfheide, 2002. "Learning-by-Doing as a Propagation Mechanism," American Economic Review, American Economic Association, vol. 92(5), pages 1498-1520, December.
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  9. Alok Johri, 2009. "Delivering Endogenous Inertia in Prices and Output," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 736-754, October.
  10. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  11. Paul Beaudry & Bernd Lucke, 2009. "Letting Different Views about Business Cycles Compete," NBER Working Papers 14950, National Bureau of Economic Research, Inc.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
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  14. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-583, August.
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  17. Sherwin Rosen, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, Oxford University Press, vol. 86(3), pages 366-382.
  18. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," CEPR Discussion Papers 4628, C.E.P.R. Discussion Papers.
  19. Den Haan, Wouter & Kaltenbrunner, Georg, 2007. "Anticipated Growth and Business Cycles in Matching Models," CEPR Discussion Papers 6063, C.E.P.R. Discussion Papers.
  20. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and Measuring Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1026-1053, October.
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  23. King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
  24. Johri, Alok & Letendre, Marc-Andre, 2007. "What do `residuals' from first-order conditions reveal about DGE models?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2744-2773, August.
  25. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
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