Explaining speculative expansions

Wei Xiao

No 2003-02, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: In this paper we use a modified neoclassical business cycle model to test two competing explanations of the expansion of the 1990s. The model can have indeterminate, multiple equilibria that give rise to expectation-driven business cycles. We fit into the model series of estimated speculative and productivity shocks and compare its predictions with empirical data. Our results suggest that the speculation hypothesis has more explanatory power than the productivity hypothesis in terms of matching the data. Speculative behavior of investors, therefore, may have contributed to the investment boom, the prolonged expansion, and the subsequent recession of the period 1991-2001.

Keywords: Neoclassical Business Cycle; Speculative Behavior; Productivity Shocks (search for similar items in EconPapers)
JEL-codes: D84 E13 E32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2003-06-16
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Related works:
Journal Article: Explaining Speculative Expansions (2004)
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