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

Walentin, Karl, Expectation Driven Business Cycles with Limited Enforcement (April 2009). Sveriges Riksbank Research Paper Series No. 60 , Sveriges Riksbank Working Paper Series No. 229, Available at SSRN: https://ssrn.com/abstract=1483017 or http://dx.doi.org/10.2139/ssrn.1483017

Karl Walentin (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.com/research/walentin