A Theory of Demand Shocks
American Economic Review · 2009 · Volume 99 · Issue 5
Abstract
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 public signal gives rise to "noise shocks," which have the features of aggregate demand shocks: they increase output, employment, and inflation in the short run and have no effects in the long run. Numerical examples suggest that the model can generate sizable amounts of noise-driven volatility. (JEL D83, D84, E21, E23, E32)
Keywords
Search, Learning, Information and Knowledge, Communication, Belief, Expectations, Speculations, Macroeconomics: Consumption, Saving, Wealth, Macroeconomics: Production, Business Fluctuations, Cycles
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