Learning Asymmetries in Real Business Cycles
37 Pages Posted: 3 Nov 2008
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Learning Asymmetries in Real Business Cycles
Date Written: December 2004
Abstract
When a boom ends, the downturn is generally sharp and short. When growth resumes, theboom is more gradual. Our explanation rests on learning about productivity. When agentsbelieve productivity is high, they work, invest, and produce more. More production generates higher precision information. When the boom ends, precise estimates of the slowdown prompt decisive reactions: Investment and labor fall sharply. When growth resumes, low production yields noisy estimates of recovery. Noise impedes learning, slows recovery, and makes boomsmore gradual than downturns. A calibrated model generates growth rate asymmetry similar to macroeconomic aggregates. Fluctuations in agents' forecast precision match observed counter cyclical errors of forecasters.
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