Can News About the Future Drive the Business Cycle?

51 Pages Posted: 27 Dec 2006

See all articles by Nir Jaimovich

Nir Jaimovich

Duke University

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change.

Keywords: Business cycles, expectations, news

JEL Classification: E3

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio, Can News About the Future Drive the Business Cycle? (October 2006). CEPR Discussion Paper No. 5877. Available at SSRN: https://ssrn.com/abstract=953825

Nir Jaimovich

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Leverone Hall
Evanston, IL 60208
United States
847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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