Inventories, rational expectations, and the business cycle

Abstract This paper evaluates complementarities of labor market institutions and the business cycle in the context of a stochastic dynamic general equilibrium model economy. Matching between workers and vacancies with endogenous time spent in search, Nash-bargained wages, payroll taxation, and differential support for unemployed labor in search and leisure are central aspects of the model. For plausible regions of the policy and institutional parameter space, the model exhibits more persistence than standard real business cycle models and can exhibit indeterminacy of rational expectations paths without increasing returns in production. Furthermore, labor market institutions act in a complementary fashion in generating these effects.

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Short Run Comovement, Persistent Shocks and the Business Cycle / Eine empirische Analyse der Wirkung kurz- und langfristiger Schocks im Konjunkturzyklus

Jahrbücher für Nationalökonomie und Statistik ◽

10.1515/jbnst-1998-0404 ◽

1998 ◽

Vol 217 (4) ◽

Author(s):

Jörg Breitung ◽

Maik Heinemann

Keyword(s):

Business Cycle ◽

Rational Expectations ◽

Impulse Response Functions ◽

Business Cycle Theory ◽

Productivity Shocks ◽

Business Cycle Fluctuations ◽

Long Run ◽

Short Run ◽

The Business Cycle ◽

System Variables

SummaryFollowing standard real business cycle theory, long run economic growth and short run business cycle fluctuations are attributed to a series of productivity shocks propagated by the economic system which is assumed to be in a rational expectations equilibrium. Characterizing the technical progress as the common stochastic trend we are able to investigate the short and long run effects of the productivity shocks using a cointegrated system. From the empirical analysis it emerges that the long run relationship between the system variables can be traced back to a single permanent component which is interpreted as a measure of technological progress. The short run dynamic impact of the permanent innovations is investigated using the empirical impulse response functions. It turns out that the permanent shocks are able to explain a substantial portion of business cycle fluctuations.

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What were they thinking? Firms' expectations since the financial crisis

Review of Behavioral Finance ◽

10.1108/rbf-07-2019-0084 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Annalisa Ferrando ◽

Ioannis Ganoulis ◽

Carsten Preuss

Keyword(s):

Financial Crisis ◽

Business Cycle ◽

Rational Expectations ◽

Structural Characteristics ◽

Direct Impact ◽

Content Type ◽

New Information ◽

Policy Transmission ◽

The Business Cycle ◽

Forward Looking

PurposeThis paper explores how firms formed their expectations about the availability of bank finance since the financial crisis. Various expectations hypotheses that incorporate backward and/or forward-looking elements and inattention are tested. From a policy perspective, the most important hypothesis is whether policy announcements have a direct impact on the expectations of companies.Design/methodology/approachThe analysis is based on a large sample of euro area companies from the ECB “Survey on the Access to Finance of Enterprises” between 2009 and 2018. Ordered logit models are used to relate individual replies on expectations to firms' information available at the time of the forecasts. The model controls for the business cycle and firms' structural characteristics. Using a difference-in-differences approach, we test how policy announcements may affect expectations.FindingsFirms update what otherwise look like adaptive expectations on the basis of new information. The hypothesis of rational expectations is rejected. Moreover, we do not find evidence of inattention or of a wave of pessimism/optimism. The analysis of expectations around the time of the ECB Outright Monetary Transactions program provides some evidence of forward-looking expectations.Originality/valueThe paper contributes to the literature on expectations by using a novel survey in eleven countries. In the multi-country setting, country-specific business cycle effects and waves of pessimism or optimism are better controlled for. The policy announcements of summer 2012 provide for a natural experiment to test the direct impact of such announcements on expectations, an issue of relevance for the monetary policy transmission to economic activity.

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Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?

Applied Economics Quarterly ◽

10.3790/aeq.64.4.325 ◽

2018 ◽

Vol 64 (4) ◽

pp. 325-350

Author(s):

Timo Pascal Kaiser

Keyword(s):

Social Interaction ◽

Business Cycle ◽

Rational Expectations ◽

Rational Expectation ◽

New Keynesian ◽

Output Gap ◽

Expectation Model ◽

The Business Cycle ◽

Animal Spirit ◽

Economic Developments

Abstract This paper introduces social-interaction based expectations in a New Keynesian frame and compares the characteristics with that of the standard rational expectation model. Agents in this model are connected with each other and build their rational expectation on their neighborhood’s opinions and recent economic developments. Instead of precise forecast they use rule of thumbs which reflect whether they assume a positive or a negative future. As result an endogenous business cycle arises. The autocorrelation of the output gap is much larger than in a model with rational expectation and two-way causality from output gap to expectation about output gap arises while kurtosis decreases and correlation between inflation and output gap is quite negative. The use of different networks changes the characteristics of the model. Situations where people trust much more their social network than economic developments can lead to continual recession, boom, inflation or deflation. JEL classifications: E10, E32, E71 Keywords: Rational expectations, non linear dynamics, animal spirit

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SELF-FULFILLING PROPHECIES AND THE BUSINESS CYCLE

Macroeconomic Dynamics ◽

10.1017/s1365100597005051 ◽

1997 ◽

Vol 1 (4) ◽

pp. 740-769 ◽

Cited By ~ 44

Author(s):

ROGER E.A. FARMER ◽

MICHAEL WOODFORD

Keyword(s):

Business Cycle ◽

Wide Class ◽

Rational Expectations ◽

Overlapping Generations ◽

Phillips Curve ◽

Signal Extraction ◽

Overlapping Generations Model ◽

Sunspot Equilibria ◽

The Business Cycle ◽

States Of Nature

We demonstrate that multiple stationary rational-expectations equilibria exist in a version of Lucas's island economy. The existence of these equilibria follows from the fact that there is an indeterminate set of monetary equilibria in the two-period overlapping-generations model. We show how to construct stationary rational-expectations equilibria by randomizing over the set of nonstationary monetary equilibria. In some of our equilibria, a positively sloped Phillips curve exists even though our economy contains no signal-extraction problem as in the original Lucas paper. Our equilibria are indexed by beliefs and are examples of the existence of sunspot equilibria in which allocations may differ across states of nature for which preferences, technology, and endowments are identical. Our technique for constructing stationary sunspot equilibria should prove useful in a wide class of models in which an indeterminate stationary equilibrium exists.

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