An exploration into Pigou's theory of cycles

Abstract

This paper explores a theory of business cycles in which recessions and booms arise due to diffi culties 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 [19 26]. 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 U. S. recessions (frequency, depth) without relying on technological regress. We argue that such a model off recession and of the Asia downturns of the late nineties.

Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks

“…For response to a positive news shock. 7 Our finding that the terms of trade and the real exchange rate appreciate while labor productivity rises holds up well in this case.…”

News and knowledge capital

“…Since this economy is taken more or less directly from Chang et al, we offer very little discussion of the modeling assumptions. 4 The economy is populated by a large number of identical infinitely-lived households. The representative household has preferences defined over sequences of consumption C t and leisure L t with expected lifetime utility defined as…”

“…Subsequent busts may follow if the anticipated increases in productivity are not fully realized. As discussed by Beaudry and Portier ( [4]), Jaimovich and Rebelo ( [17]) and others, the typical business cycle model is unable to deliver booms in which consumption, investment and hours all rise along with output in the periods after the news arrives but before the shock to productivity actually occurs 2 .…”

“…Beaudry and Portier ( [4]) consider a model with a durable and nondurable good that are produced in two distinct sectors. A complementarity between the two allows both consumption and investment to rise in response to news about a productivity increase in the non-durable goods sector.…”

Expectation driven business cycles with limited enforcement

“…Another related paper is Chen and Song (2008) who explore capital reallocation in a setting with expectation shocks and a collateral constraint on entrepreneurs' financing. 1 The model in Beaudry and Portier (2004) generates the same type of comovement between expected future productivity and current stock prices as our model. The main difference is that they use a three sector model with complementarities between capital and the intermediate good, and a shock to the productivity of the intermediate goods sector.…”