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On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment

  • Jang-Ting Guo


    (Department of Economics, University of California Riverside)

  • Anca-Ioana Sirbu


    (Department of Economics, University of California Riverside)

  • Richard M. H. Suen


    (Department of Economics, University of California Riverside)

Eusepi (2009, International Journal of Economic Theory 5, pp. 9-23) analytically finds that a one-sector real business cycle model may exhibit positive co-movement between consumption and investment when the equilibrium wage-hours locus is positively-sloped and steeper than the householdiÌs labor supply curve. However, we show that this condition does not imply expectations-driven business cycles will emerge in EusepiiÌs model. Specifically, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period.

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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201009.

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Date of creation: Sep 2010
Date of revision: Sep 2010
Handle: RePEc:ucr:wpaper:201009
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  1. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
  2. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  3. Nir Jaimovich & Sergio Rebelo, 2008. "News and Business Cycles in Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1699-1711, December.
  4. Beaudry, Paul & Portier, Franck, 2007. "When can changes in expectations cause business cycle fluctuations in neo-classical settings?," Journal of Economic Theory, Elsevier, vol. 135(1), pages 458-477, July.
  5. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers 5877, C.E.P.R. Discussion Papers.
  6. Stefano Eusepi*, 2009. "On expectations-driven business cycles in economies with production externalities," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 9-23.
  7. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
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