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Long-run growth uncertainty
Institution:1. Department of Economics, University of Oslo, Norway;2. Department of Economics, Norwegian University of Science and Technology, Norway;3. School of Economics, University of East Anglia, Norwich, United Kingdom;1. University of California, Santa Barbara, USA;2. Federal Reserve Bank of Dallas, Research Department, 2200 N. Pearl St., Dallas, TX 75201, USA;1. Department of Economics, The University of Warwick, The Social Sciences Building, Coventry, West Midlands CV4 7AL, United Kingdom;2. European Central Bank, Fiscal Policies Division, Sonnemannstrasse 20, D-60314 Frankfurt am Main, Germany;1. Hong Kong University of Science and Technology, Hong Kong;2. Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, USA;3. Central Bank of Chile, Chile;4. Toulouse School of Economics, France;1. School of Economics, Kwansei Gakuin University, 1-155 Uegahara Ichiban-Cho, Nishinomiya, Hyogo 662-8501, Japan;2. Institute of Economic Research, Kyoto University, Japan
Abstract:Observed macroeconomic forecasts display a positive correlation between expectations of long-run growth of endogenous variables (e.g., output) and cyclical activity. Existing business cycle models appear inconsistent with the evidence. This paper presents a model of the business cycle in which households have imperfect knowledge of long-run growth rate of endogenous variables and continually learn about these growth rates. The model features comovement and mutual influence between households׳ growth expectations and market outcomes. It can replicate the evidence on growth forecasts and suggests that optimism and pessimism about long-run growth rates is a crucial ingredient in understanding business cycle fluctuations.
Keywords:Trend  Expectations  Business cycle
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