Expectations, self-fulfilling prophecies and the business cycle

Frédéric Dufourt, Kazuo Nishimura and Alain Venditti

No 2234, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Macroeconomic models in which exogenous, self-fulfilling changes in expectations play a significant role in output fluctuations are often discarded on two claims: they require implausible calibrations of structural parameters and they are enable to account for several empirical features associated with demand shocks. We show that these claims are only valid to the extent that they are applied to one-sector models. In contrast, we prove that two-sector models allow the existence of self-fulfilling prophecies for a large set of empirically realistic values for all the structural parameters, and that a two-sector model submitted to sunspot shocks can account not only for all the standard stylized facts associated with demand shocks, but also for other dimensions of the business cycle that standard RBC-type models cannot explain.

Keywords: indeterminacy; one and two-sector models; endogenous labor supply; income e ect; productive externalities; permanent and transitory shocks (search for similar items in EconPapers)
JEL-codes: C62 E32 O41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2023-01
New Economics Papers: this item is included in nep-dge
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Working Paper: Expectations, self-fulfilling prophecies and the business cycle (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2234

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