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News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle
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Lilia Karnizova
Published/Copyright:
June 12, 2012
Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995--2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate "the productivity prospects": a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession.
Published Online: 2012-6-12
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
boom-bust cycles;
news shocks;
investment;
expectations;
preferences for wealth
Articles in the same Issue
- Advances Article
- Life Cycle Dynamics of Income Uncertainty and Consumption
- Immigration, Fiscal Policy, and Welfare in an Aging Population
- Contributions Article
- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries
- How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects
- Economic Growth and Political Survival
- Exchange Rate Uncertainty and Trade
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms
- A Unified Framework for Using Micro-Data to Compare Dynamic Time-Dependent Price-Setting Models
- Government Policy Response to War-Expenditure Shocks
- Poverty Traps and Growth in a Model of Endogenous Time Preference
- Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending
- Great Spending Crashes
- Capital Utilization and the Amplification Mechanism
- Topics Article
- Unemployment Expectations and the Business Cycle
- Sector-Specific Capital, Labor Market Distortions and Cross-Country Income Differences: A Two-Sector General Equilibrium Approach
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- Consumption, Leisure and Borrowing Constraints
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