On expectations‐driven business cycles in economies with production externalities: A comment |
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| Authors: | Jang‐Ting Guo Anca‐Ioana Sirbu Richard MH Suen |
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| Institution: | 1. Department of Economics, University of California, Riverside, CA, USA. Email: guojt@ucr.edu;2. Department of Economics, University of California, Riverside, CA, USA.;3. Department of Economics, University of Connecticut, Storrs, CT, USA. |
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| Abstract: | Eusepi (2009, International Journal of Economic Theory 5, pp. 9–23) analytically finds that a one‐sector real business cycle model may exhibit positive co‐movement between consumption and investment when the equilibrium wage‐hours locus is positively sloped and steeper than the household’s labor supply curve. However, we show that this condition does not imply that expectations‐driven business cycles will emerge in Eusepi's model. Specifically, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period. |
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| Keywords: | expectations‐driven business cycles production externalities C62 E32 |
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