Behavioral Theories of the Business Cycle

Nir Jaimovich and Sergio Rebelo ()

No 07-015, Discussion Papers from Stanford Institute for Economic Policy Research

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.

Keywords: business cycle; optimism; overconfidence; volatility (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Date: 2006-10
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Behavioral Theories of the Business Cycle (2007)
Working Paper: Behavioural Theories of the Business Cycle (2006)
Working Paper: Behavioral Theories of the Business Cycle (2006)
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