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The Spirit of Capitalism and Expectation Driven Business Cycles

  • Lilia Karnizova

    ()

    (Department of Economics, University of Ottawa)

While news shocks are believed to be instrumental in explaining business cycles, many existing models fail to predict an economic boom in consumption, investment, employment, output and the stock market in response to good news about future productivity. This paper proposes and evaluates a model with the intrinsic desire for wealth accumulation, or ‘the spirit of capitalism’ hypothesis, which generates the aforementioned responses. Restrictions for the existence of expectation driven business cycles are derived analytically. The restrictions are confirmed by an estimated version of the model. The proposed preference specification is supported with additional empirical evidence.

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Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0804E.

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Length: 49 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:ott:wpaper:0804e
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  1. Ruge-Murcia, Francisco J., 2002. "Methods to Estimate Dynamic Stochastic General Equilibrium Models," University of California at San Diego, Economics Working Paper Series qt4fc8x822, Department of Economics, UC San Diego.
  2. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
  3. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  4. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  5. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," IDEI Working Papers 304, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," IDEI Working Papers 158, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Beaudry, Paul & Portier, Franck, 2005. "The 'News' View of Economic Fluctuations: Evidence from Aggregate Japanese Data and Sectoral US Data," CEPR Discussion Papers 5176, C.E.P.R. Discussion Papers.
  8. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  9. Francis, Johanna L., 2007. "Wealth and the Capitalist Spirit," MPRA Paper 5985, University Library of Munich, Germany.
  10. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  11. Bisin, A. & Verdier, T., 1997. "On the Cultural Transmission of Preferences for Social Status," DELTA Working Papers 97-04, DELTA (Ecole normale supérieure).
  12. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
  13. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  14. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
  15. Boileau, Martin & Braeu, Rebecca, 2007. "The Spirit Of Capitalism, Asset Returns, And The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, vol. 11(02), pages 214-230, April.
  16. Grant McQueen, 2004. "Whence GARCH? A Preference-Based Explanation for Conditional Volatility," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 915-949.
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