A Theory of Demand Shocks
Guido Lorenzoni
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| Article Citation |
Lorenzoni, Guido. 2009. "A Theory of Demand Shocks." American Economic Review, 99(5): 2050–84.
DOI:10.1257/aer.99.5.2050
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| 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)
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| Article Full-Text Access |
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| Additional Materials |
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| Appendix
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| Authors |
Lorenzoni, Guido (MIT)
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| JEL Classifications |
D83: Search; Learning; Information and Knowledge; Communication; Belief
D84: Expectations; Speculations
E21: Macroeconomics: Consumption; Saving; Wealth
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
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