Can news about the future drive the business cycle?

Nir Jaimovich*, Sergio Rebelo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

362 Scopus citations

Abstract

Aggregate and sectoral comovement are central features of business cycles, so the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most models fail. We propose a unified model that generates aggregate and sectoral comovement in response to contemporaneous and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral total factor productivity shocks as well as investmentspecific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply. (JEL E13, E20, E32).

Original languageEnglish (US)
Pages (from-to)1097-1118
Number of pages22
JournalAmerican Economic Review
Volume99
Issue number4
DOIs
StatePublished - Sep 2009

ASJC Scopus subject areas

  • Economics and Econometrics

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