TY  - JOUR
AU  - Jaimovich,Nir
AU  - Rebelo,Sergio
TI  - Behavioral Theories of the Business Cycle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12570
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12570
L1  - http://www.nber.org/papers/w12570.pdf
N1  - Author contact info:
Nir Jaimovich
Department of Economics
Duke University
213 Social Services Building
Durham, NC 27708
Tel: 919/660-1864
E-Mail: njaimo@gmail.com

Sergio Rebelo
Northwestern University
Kellogg School of Management
Department of Finance
Leverone Hall
Evanston, IL  60208-2001
Tel: 847/467-2329
Fax: 847/491-5719
E-Mail: s-rebelo@northwestern.edu
AB  - We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.
ER  -