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News Shocks and Learning-by-doing

Hammad Qureshi

No 09-06, Working Papers from Ohio State University, Department of Economics

Abstract: The idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD.

Keywords: News Shocks; Learning-by-Doing; Pigou Cycles (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-06
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (10) Track citations by RSS feed

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