TY  - JOUR
AU  - Beaudry,Paul
AU  - Portier,Franck
TI  - When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10776
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10776
L1  - http://www.nber.org/papers/w10776.pdf
N1  - Author contact info:
Paul Beaudry
Department of Economics
University of British Columbia
997-1873 East Mall
Vancouver, B.C.
Canada,  V6T 1Z1
Tel: 604/822-8624
Fax: 604/822-5915
E-Mail: paulbe@interchange.ubc.ca

Franck Portier
Toulouse School of Economics
University of Toulouse
Manufacture des Tabacs
21 Allee de Brienne
31000 Toulouse, FRANCE
Tel: +33 561128840
E-Mail: franck.portier@tse-fr.eu
AB  - It is often argued that changes in expectation are an important driving force of the business cycle. However, it is well known that changes in expectations cannot generate positive co-movement between consumption, investment and employment in the most standard neo-classical business cycle models. This gives rise to the question of whether changes in expectation can cause business cycle fluctuations in neo-classical setting or whether such a phenomenon is inherently related to market imperfections. This paper offers a systematic exploration of this issue. Our finding is that expectation driven business cycle fluctuation can arise in neo-classical models when one allows for a sufficient rich description of the inter-sectorial production technology, however such a structure is rarely allowed in macro-models. In particular, the key characteristic which we isolate as giving rise to the possibility of Expectation Driven Business Cycles is that intermediate good producers exhibit cost complementarities (i.e., economies of scope) when supplying intermediate goods to different sectors of the economy.
ER  -