Behavioral theories of the business cycle

Nir Jaimovich*, Sergio Rebelo

*Corresponding author for this work

Research output: Contribution to journalArticle

16 Scopus citations

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, whereas 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.

Original languageEnglish (US)
Pages (from-to)361-368
Number of pages8
JournalJournal of the European Economic Association
Volume5
Issue number2-3
DOIs
StatePublished - Apr 2007

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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