Behavioural Theories of the Business Cycle

13 Pages Posted: 29 Dec 2006

See all articles by Nir Jaimovich

Nir Jaimovich

University of Zurich

Sergio T. Rebelo

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

Date Written: October 2006

Abstract

We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.

Keywords: Business cycles, overconfidence, optimism, expectations

JEL Classification: E3

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio, Behavioural Theories of the Business Cycle (October 2006). CEPR Discussion Paper No. 5909. Available at SSRN: https://ssrn.com/abstract=954135

Nir Jaimovich

University of Zurich ( email )

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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