News Shocks and Business Cycles

25 Pages Posted: 16 Dec 2012

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Alisdair McKay

Boston University - Department of Economics

Date Written: 2010

Abstract

This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables — consumption, investment, and employment — to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.

Suggested Citation

Krusell, Per L. and McKay, Alisdair, News Shocks and Business Cycles (2010). FRB Richmond Economic Quarterly, vol. 96, no. 4, Fourth Quarter 2010, pp. 373-397, Available at SSRN: https://ssrn.com/abstract=2189103

Per L. Krusell (Contact Author)

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alisdair McKay

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/amckay

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