Behavioural Theories of the Business Cycle

Sergio Rebelo () and Nir Jaimovich

No 5909, CEPR Discussion Papers from Centre 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 cycles; Overconfidence; Optimism; Expectations (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-bec, nep-dge, nep-hpe and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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