Behavioral Theories of the Business Cycle

Nir Jaimovich and Sergio Rebelo ()

No 12570, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2006-10
Note: EFG
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Related works:
Working Paper: Behavioural Theories of the Business Cycle (2006)
Journal Article: Behavioral Theories of the Business Cycle (2007)
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