News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle

Lilia Karnizova

No 1201E, Working Papers from University of Ottawa, Department of Economics

Abstract: Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995–2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate “the productivity prospects”: a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession.

Keywords: boom-bust cycles; news shocks; investment; expectations; preferences for wealth (search for similar items in EconPapers)
JEL-codes: E21 E22 E27 E32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Journal Article: News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle (2012)
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