Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy

Keiichiro Kobayashi and Kengo Nutahara

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives.

New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Date: Written
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