Communication frictions, sentiments, and nonlinear business cycles

Libo Xu and Apostolos Serletis

International Journal of Economic Theory, 2019, vol. 15, issue 2, 137-152

Abstract: In the context of a rational expectations macroeconomic model with communication frictions, we show that the level of economic activity is a nonlinear and time‐varying function of aggregate economic fundamentals and sentiment shocks. In particular, because of communication frictions, it is possible for small changes in sentiment shocks to cause large changes in aggregate output, and, similarly, for large changes in sentiment shocks to cause small changes in aggregate output. We also find that communication frictions have nonlinear effects on the variance of aggregate output, meaning that improving the communication does not always reduce the variance of aggregate output.

Date: 2019
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https://doi.org/10.1111/ijet.12163

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Working Paper: Communication Frictions, Sentiments, and Nonlinear Business Cycles (2016)
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