A Theory of Demand Shocks
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Open Access
- 1 December 2009
- journal article
- research article
- Published by American Economic Association in American Economic Review
- Vol. 99 (5) , 2050-2084
- https://doi.org/10.1257/aer.99.5.2050
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
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