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  4. December 2009
  5. A Theory of Demand Shocks

A Theory of Demand Shocks

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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)

Citation

Lorenzoni, Guido. 2009. "A Theory of Demand Shocks." American Economic Review, 99 (5): 2050-84. DOI: 10.1257/aer.99.5.2050

Additional Materials

JEL Classification

  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • D84 Expectations; Speculations
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles