Working Paper: NBER ID: w19411
Authors: Paul Beaudry; Franck Portier
Abstract: There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established.
Keywords: business cycles; expectations; news shocks
JEL Codes: E00; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in agents' expectations driven by the arrival of news (D84) | Boom and bust cycles in the economy (E32) |
| Optimistic news about future economic conditions (E66) | Boom (E32) |
| Incorrect or overly optimistic news (E32) | Economic downturns (E32) |
| Speculative behavior driven by perceived future demands (D84) | Fluctuations in investment and employment (E32) |
| Efficiency of business cycles (E32) | Contingent upon underlying economic conditions and accuracy of information (D89) |