Expectation Driven Business Cycles with Limited Enforcement
Sveriges Riksbank Research Paper Series No. 60
Sveriges Riksbank Working Paper Series No. 229
37 Pages Posted: 12 Oct 2009 Last revised: 27 Oct 2011
Date Written: April 2009
Abstract
We explore the implications of shocks to expected future productivity. In a setting with limited enforcement of financial contracts, firms have to post collateral to obtain external finance. In a real one-sector model with this type of "collateral constraint", positive news about future productivity implies an increase in stock prices, as well as the other properties of an expectation-driven business cycle. Furthermore, these properties are obtained with standard consumption preferences and capital adjustment costs.
Keywords: news shocks, limited enforcement, collateral constraints, stock prices
JEL Classification: E22, E32, E44, E52
Suggested Citation: Suggested Citation
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