A Theory of Demand Shocks

@inproceedings{Lorenzoni2008ATO,
  title={A Theory of Demand Shocks},
  author={Guido Lorenzoni},
  year={2008}
}
This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to “noise shocks,” which have the features of aggregate demand shocks: they increase output, employment and in‡ation in the short run and have no e¤ects in the long run. The dynamics of the economy… CONTINUE READING
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