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

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

scholarly journals Asset Returns, the Business Cycle and the Labor Market

2013 ◽  
Vol 14 (3) ◽  
pp. 372-397 ◽  
Author(s):  
Burkhard Heer ◽  
Alfred Maußner
Keyword(s):  
Labor Market ◽  
Business Cycle ◽  
Equity Premium ◽  
Working Hours ◽  
New Keynesian ◽  
Monetary Shocks ◽  
Productivity Shocks ◽  
New Keynesian Models ◽  
The Business Cycle ◽  
Sticky Wages

Abstract We review the labor market implications of recent real-business cycle and New Keynesian models that successfully replicate the empirical equity premium. We document the fact that all models reviewed in this article that do not feature either sticky wages or immobile labor between two production sectors as in Boldrin et al. (2001) imply a negative correlation of working hours and output that is not observed empirically. Within the class of Neo-Keynesian models, sticky prices alone are demonstrated to be less successful than rigid nominal wages with respect to the modeling of the labor market stylized facts. In addition, monetary shocks in these models are required to be much more volatile than productivity shocks to match statistics from both the asset and labor market.

scholarly journals The Formation of Expectations, Inflation, and the Phillips Curve

2018 ◽  
Vol 56 (4) ◽  
pp. 1447-1491 ◽  
Author(s):  
Olivier Coibion ◽  
Yuriy Gorodnichenko ◽  
Rupal Kamdar
Keyword(s):  
Survey Data ◽  
Rational Expectations ◽  
Phillips Curve ◽  
Rational Expectation ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Full Information ◽  
Macroeconomic Modeling ◽  
Expectations Formation

This paper argues for a careful (re)consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses. While the rational expectations revolution has allowed for great leaps in macroeconomic modeling, the surveyed empirical microevidence appears increasingly at odds with the full-information rational expectation assumption. We explore models of expectation formation that can potentially explain why and how survey data deviate from full-information rational expectations. Using the New Keynesian Phillips curve as an extensive case study, we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full-information rational expectations. (JEL D04, E24, E27, E31, E37)

scholarly journals The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Phuong V. Nguyen
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Research Paper ◽  
New Keynesian ◽  
Dsge Model ◽  
Content Type ◽  
Business Cycle Fluctuations ◽  
Dynamic Stochastic ◽  
The Business Cycle

PurposeThe primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.Design/methodology/approachA SOE-NK-DSGE model—Bayesian estimation.FindingsThis paper analyzes the sources of the business cycle fluctuations in Vietnam.Originality/valueThis research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

scholarly journals Industrial Electricity Usage and Stock Returns

2017 ◽  
Vol 52 (1) ◽  
pp. 37-69 ◽  
Author(s):  
Zhi Da ◽  
Dayong Huang ◽  
Hayong Yun
Keyword(s):  
Growth Rate ◽  
Asset Pricing ◽  
Business Cycle ◽  
Stock Returns ◽  
Real Time ◽  
Risk Premium ◽  
Output Gap ◽  
Financial Variables ◽  
The Future ◽  
The Business Cycle

The growth rate of industrial electricity usage predicts future stock returns up to 1 year with an R2 of 9%. High industrial electricity usage today predicts low stock returns in the future, consistent with a countercyclical risk premium. Industrial electricity usage tracks the output of the most cyclical sectors. Our findings bridge a gap between the asset pricing literature and the business cycle literature, which uses industrial electricity usage to gauge production and output in real time. Industrial electricity growth compares favorably with traditional financial variables, and it outperforms Cooper and Priestley’s output gap measure in real time.

scholarly journals Understanding Business Cycle Fluctuations in Pakistan

2020 ◽  
Vol 59 (1) ◽  
pp. 1-28
Author(s):  
Gulzar Khan ◽  
Ather Maqsood Ahmed
Keyword(s):  
Exchange Rate ◽  
Business Cycle ◽  
Open Economy ◽  
Rational Expectations ◽  
Forecast Error ◽  
Error Variance ◽  
New Keynesian ◽  
Impulse Response Functions ◽  
Business Cycle Fluctuations ◽  
The Exchange Rate

Notwithstanding the level of improvement in understanding the complexities of an economy, it is now well accepted that the ultimate incidence of various policy interventions leads to varied outcomes in terms of magnitude and persistence depending upon the structure of the economy. The objective of the present study is to disentangle the relative contributions of various exogenous and domestic shocks that contribute to business cycle fluctuations in Pakistan. The study is based on the New-Keynesian Open economy model, which is an extended version of (Gali & Monacili 2005). Keating’s two-step approach (1990, 2000) is employed to capture the dynamic behaviour of the variables of interest. Impulse response functions, along with forecast error variance decomposition analyses, are used to gain useful insights into the understanding of the transmission mechanism of policy and non-policy shocks. It is observed that fiscal policy does matter, at least in the short-run. The interest rate shock leads to the exchange rate appreciation thereby confirming the exchange rate puzzle. In response to adverse supply shocks, the Monetary Authority responds with a monetary contraction that prolongs the recessionary periods. Furthermore, it has a limited power to control inflation as inflation in Pakistan stems from supply-side factors as well as fiscal dominance. JEL Classification: C32, E52, E62, F41 Keywords: Open Economy, New Keynesian Model, Rational Expectations, Exchange Rate Puzzle

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