Man-Bites-Dog Business Cycles
American Economic Review · 2014 · Volume 104 · Issue 8
Abstract
The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. Signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents. In a simple business cycle model, such signals can explain why we observe (i) occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of survey expectations.
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Mechanism Design, Expectations, Speculations, Macroeconomics: Production, Price Level, Inflation, Deflation, Business Fluctuations, Cycles
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