Working Paper: CEPR ID: DP5877
Authors: Nir Jaimovich; Sergio Rebelo
Abstract: We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labour supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change.
Keywords: business cycles; expectations; news
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive news about future total factor productivity (TFP) (O49) | economic expansions (E32) |
| positive news about investment-specific technical change (O33) | economic expansions (E32) |
| weak short-run wealth effect on labor supply (H31) | hours worked increase (J29) |
| lackluster expectations about future TFP (F17) | recessions (E32) |
| lackluster expectations about investment-specific technical change (E22) | recessions (E32) |
| news shocks (G14) | consumption (E21) |
| news shocks (G14) | investment (G31) |
| news shocks (G14) | output (C67) |