Expectations, learning and business cycle fluctuations
By: Stefano Eusepi, Bruce Preston.
Contributors: Preston, Bruce; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 14181; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 14181.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper develops a theory of expectations-driven business cycles based on learning.  Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics.  In a real business cycle model, the theoretical framework amplifies and propagates technology shocks.  Improved correspondence with data arises from dynamics in beliefs being themselves persistent and because they generate strong intertemporal substitution effects in consumption and leisure.  Output volatility is comparable with a rational expectations analysis with a standard deviation of technology shock that is 20 percent smaller, and has substantially more volatility in investment and hours.  Persistence in these series is captured, unlike in standard models.  Inherited from real business cycle theory, the benchmark model suffers a comovement problem between consumption, hours, output and investment.  An augmented model that is consistent with expectations-driven business cycles, in the sense of Beaudry and Portier (2006), resolves these counterfactual predictions"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/23/2008.

Includes bibliographical references.

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