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A Theory of Demand Shocks

Author(s)
Lorenzoni, Guido
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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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.
Date issued
2009-12
URI
http://hdl.handle.net/1721.1/51815
Department
Massachusetts Institute of Technology. Department of Economics
Journal
American Economic Review
Publisher
American Economic Association
Citation
Lorenzoni, Guido 2009. "A Theory of Demand Shocks." American Economic Review, 99(5): 2050–84.
Version: Author's final manuscript
ISSN
0002-8282

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