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American Economic Review: Vol. 99 No. 5 (December 2009)

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A Theory of Demand Shocks

Article Citation

Lorenzoni, Guido. 2009. "A Theory of Demand Shocks." American Economic Review, 99(5): 2050-84.

DOI: 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)

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Authors

Lorenzoni, Guido (MIT)

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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