A theory of demand shocks

Guido Lorenzoni*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

122 Scopus citations

Abstract

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to "noise shocks," which have the features of aggregate demand shocks: they increase output, employment, and inflation in the short run and have no effects in the long run. Numerical examples suggest that the model can generate sizable amounts of noise-driven volatility. (JEL D83, D84, E21, E23, E32).

Original languageEnglish (US)
Pages (from-to)2050-2084
Number of pages35
JournalAmerican Economic Review
Volume99
Issue number5
DOIs
StatePublished - Dec 1 2009

ASJC Scopus subject areas

  • Economics and Econometrics

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