A theory of demand shocks
By: Guido Lorenzoni
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 12477; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 12477.
Publisher: National Bureau of Economic Research
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity.  Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity.  The shock to this public signal, or "news shock," has the features of an aggregate demand shock: it increases output, employment and inflation in the short run and has no effects in the long run.  The dynamics of the economy following an aggregate productivity shock are also affected by the presence of imperfect information: after a productivity shock output adjusts gradually to its higher long-run level, and there is a temporary negative effect on inflation and employment.  A calibrated version of the model is able to generate realistic amounts of short-run volatility due to demand shocks, in line with existing time-series evidence.  The paper also develops a simple method to solve forward-looking models with dispersed information"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 9/7/2006.

Includes bibliographical references.

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