Behavioral Theories of the Business Cycle

Nir Jaimovich and Sergio Rebelo ()

Journal of the European Economic Association, 2007, vol. 5, issue 2-3, 361-368

Abstract: We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimismand overconfidence. The expectations of optimistic agents are biased toward good outcomes, whereas overconfident agentsoverestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increasebusiness-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: E3) (c) 2007 by the European Economic Association.

Date: 2007
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Working Paper: Behavioural Theories of the Business Cycle (2006)
Working Paper: Behavioral Theories of the Business Cycle (2006)
Working Paper: Behavioral Theories of the Business Cycle (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:jeurec:v:5:y:2007:i:2-3:p:361-368

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