Expectation Driven Business Cycles with Limited Enforcement
Sveriges Riksbank Research Paper Series No. 60
Sveriges Riksbank Working Paper Series No. 229
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.
Number of Pages in PDF File: 37
Keywords: news shocks, limited enforcement, collateral constraints, stock prices
JEL Classification: E22, E32, E44, E52working papers series
Date posted: October 12, 2009 ; Last revised: October 27, 2011
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