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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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File URL: http://sciencessociales.uottawa.ca/economics/sites/socialsciences.uottawa.ca.economics/files/0804E.pdf
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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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