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Explaining the last consumption boom-bust cyclein Ireland : the role of news and noise shocks

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  • Diaz Sanchez, Jose Luis

Abstract

The objective of the paper is to explain the last boom and bust in consumption in Ireland by the failure of consumers to correctly distinguish permanent changes in productivity from temporary changes. It uses a business cycle model, where agents update their beliefs about long-run productivity using information -that they receive continuously- about the future state of the economy. The analysis finds that a large and prolonged disconnect between consumption and long-run productivity occurred in the years leading to the economic crisis, which led to -- over-consumption -- for several quarters. A strong downward adjustment in 2008 followed when Irish consumers finally realized their mistake.

Suggested Citation

  • Diaz Sanchez, Jose Luis, 2013. "Explaining the last consumption boom-bust cyclein Ireland : the role of news and noise shocks," Policy Research Working Paper Series 6525, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6525
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    References listed on IDEAS

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    1. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: A Survey," Advances in Econometrics, in: DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments, pages 3-38, Emerald Group Publishing Limited.
    2. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-2084, December.
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