TY  - JOUR
AU  - Lorenzoni,Guido
TI  - A Theory of Demand Shocks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12477
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12477
L1  - http://www.nber.org/papers/w12477.pdf
N1  - Author contact info:
Guido Lorenzoni
MIT Department of Economics
E52-251C
50 Memorial Drive
Cambridge, MA 02142-1347
Tel: 617/253-4836
Fax: 617/253-1330
E-Mail: glorenzo@mit.edu
M3  - presented at "EFG Research Meeting", July 16, 2005
AB  - 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 shock to this public signal, or "news shock," has the features of an aggregate demand shock: it increases output, employment and inflation in the short run and has no effects in the long run. The dynamics of the economy following an aggregate productivity shock are also affected by the presence of imperfect information: after a productivity shock output adjusts gradually to its higher long-run level, and there is a temporary negative effect on inflation and employment. A calibrated version of the model is able to generate realistic amounts of short-run volatility due to demand shocks, in line with existing time-series evidence. The paper also develops a simple method to solve forward-looking models with dispersed information.
ER  -