Working Paper: CEPR ID: DP2996
Authors: Paul Beaudry; Franck Portier
Abstract: This Paper proposes a model of business cycles in which recessions and booms arise as the result of difficulties encountered by agents in properly forecasting the economy's future needs in terms of capital. The idea has a long history in the macroeconomic literature, as reflected by the work of Pigou [1926]. The contribution of this Paper is twofold. First, we illustrate the type of general equilibrium structure that can give rise to such phenomena. Second, we examine the extent to which such a model can explain the observed pattern of US recessions (frequency, depth) without relying on technological regress. We argue that such a model may offer an explanation as to why recession appear to be driven by declines in aggregate demand even in the absence of any significant price rigidities, and may also help understand elements of the recent downturns in Asia.
Keywords: Equilibrium; Business Cycles; Expectations; Recessions; Technological Progress
JEL Codes: C52; D58; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forecast errors (C53) | business cycles (E32) |
| optimistic expectations about future demand (D84) | increased investment and consumption (E20) |
| increased investment and consumption (E20) | boom (E32) |
| anticipated improvements not materializing (O49) | retrenched investment (G31) |
| retrenchment of investment (G31) | recession (E32) |
| optimism about future productivity (O49) | misallocation of resources (D61) |
| forecast errors (C53) | fluctuations in investment and consumption (E20) |