TY - JOUR
T1 - Behavioral theories of the business cycle
AU - Jaimovich, Nir
AU - Rebelo, Sergio
PY - 2007/4
Y1 - 2007/4
N2 - 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.
AB - 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.
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U2 - 10.1162/jeea.2007.5.2-3.361
DO - 10.1162/jeea.2007.5.2-3.361
M3 - Article
AN - SCOPUS:36749056242
SN - 1542-4766
VL - 5
SP - 361
EP - 368
JO - Journal of the European Economic Association
JF - Journal of the European Economic Association
IS - 2-3
ER -