American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Expectations, Learning, and Business Cycle Fluctuations
American Economic Review
vol. 101,
no. 6, October 2011
(pp. 2844–72)
Abstract
This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. Learning breaks the tight link between fundamentals and equilibrium prices, inducing periods of erroneous optimism or pessimism about future returns to capital and wages which subsequent data partially validate. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Moreover, it produces agents' forecast errors consistent with business cycle properties of forecast errors for a wide range of variables from the Survey of Professional Forecasters. (JEL C53, D83, D84, E32, E37)Citation
Eusepi, Stefano, and Bruce Preston. 2011. "Expectations, Learning, and Business Cycle Fluctuations." American Economic Review, 101 (6): 2844–72. DOI: 10.1257/aer.101.6.2844Additional Materials
JEL Classification
- C53 Forecasting Methods; Simulation Methods
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- D84 Expectations; Speculations
- E32 Business Fluctuations; Cycles
- E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications