A Theory of Demand Shocks
MetadataShow full item record
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.
DepartmentMassachusetts Institute of Technology. Department of Economics
American Economic Review
American Economic Association
Lorenzoni, Guido 2009. "A Theory of Demand Shocks." American Economic Review, 99(5): 2050–84.
Author's final manuscript