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American Economic Review: Vol. 99 No. 4 (September 2009)

AER Volume. 99, Issue 4 | Next Article

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Can News about the Future Drive the Business Cycle?

Article Citation

Jaimovich, Nir, and Sergio Rebelo. 2009. "Can News about the Future Drive the Business Cycle?." American Economic Review, 99(4): 1097-1118.

DOI: 10.1257/aer.99.4.1097

Abstract

Aggregate and sectoral comovement are central features of business cycles, so the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most models fail. We propose a unified model that generates aggregate and sectoral comovement in response to contemporaneous and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral total factor productivity shocks as well as investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply. (JEL E13, E20, E32)

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Authors

Jaimovich, Nir (Stanford U)
Rebelo, Sergio (Northwestern U)

JEL Classifications

E13: General Aggregative Models: Neoclassical
E20: Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data)
E32: Business Fluctuations; Cycles