A Theory of Demand Shocks

Guido Lorenzoni ()

No 12477, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D58 D84 E32 E40 (search for similar items in EconPapers)
Date: 2006-08
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (21)

Published as Lorenzoni, Guido. "A Theory of Demand Shocks." American Economic Review 99, 5 (2009): 2050-2084.

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Journal Article: A Theory of Demand Shocks (2009)
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