Can News About the Future Drive the Business Cycle?
Aggregate and sectoral comovement are central features of business cycle data. Therefore, the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most existing models fail. In this paper we propose a unified model that generates both aggregate and sectoral comovement in response to contemporaneous shocks and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral TFP shocks as well as investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and a new form of preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply.
We thank the editor, Mark Gertler, three anonymous referees, and Gadi Barlevy, Paul Beaudry, Larry Christiano, Fabrice Collard, Wouter Denhaan, Martin Eichenbaum, Zvi Hercowitz, Erin Hoge, Navin Kartik, Benjamin Malin, Franck Portier, and Laura Veldkamp for their comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September. citation courtesy of