Learning from prices: amplication and business fluctuations
Ryan Chahrour and
Gaetano Gaballo ()
No 2053, Working Paper Series from European Central Bank
We provide a new theory of expectationsdriven business cycles in which consumers’ learning from prices dramatically alters the eﬀects of aggregate shocks. Learning from prices causes changes in aggregate productivity to shift aggregate beliefs, generating positive price-quantity comovement. The feedback of beliefs into prices can be so strong that even arbitrarily small productivity shocks lead to substantial ﬂuctuations. Augmented with a public signal, the model can generate a rich mix of supply- and demand-driven ﬂuctuations even though productivity is the only source of aggregate randomness. Our results imply that many standard identiﬁcation assumptions used to disentangle supply and demand shocks may not be valid in environments in which agents learn from prices. JEL Classification: D82, D83, E3
Keywords: animal spirits; expectations; incomplete information (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172053
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