Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153389
Authors: 
Christiano, Lawrence
Ilut, Cosmin
Motto, Roberto
Rostagno, Massimo
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 955
Abstract: 
We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and a Taylorrule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations.
Subjects: 
Asset price boom-busts
DSGE Models
monetary policy
JEL: 
C11
C51
E5
E13
E32
Document Type: 
Working Paper

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