Shocks and Business Cycles

David Frankel

Working Papers from Tel Aviv

Abstract: A popular theory of business cycles is that they are driven by animal spirits: shifts in expectations brought on by sunspots. Two prominent examples are Diamond (JPE, 1982) and Howitt and McAfee (AER, 1992). We show that these models have unique equilibria if there are payoff shocks of any size. At critical junctures, a small negative shock can cause the economy to slide into a recession. Once this happens, a sustained sequence of positive shocks is needed to spark an expansion.

Keywords: GAMES; FLUCTUATIONS; BUSINESS CYCLES (search for similar items in EconPapers)
JEL-codes: C73 E32 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2001
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Journal Article: Shocks and Business Cycles (2005)
Working Paper: Shocks and Business Cycles (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:teavfo:2001-10

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