Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/175677 
Year of Publication: 
2017
Series/Report no.: 
ECB Working Paper No. 2053
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We provide a new theory of expectations-driven business cycles in which consumers' learning from prices dramatically alters the effects of aggregate shocks. Learning from prices causes changes in aggregate productivity to shift aggregate beliefs, generating positive price-quantity comovement. The feedback of beliefs into prices can be so strong that even arbitrarily small productivity shocks lead to substantial fluctuations. Augmented with a public signal, the model can generate a rich mix of supply- and demand-driven fluctuations even though productivity is the only source of aggregate randomness. Our results imply that many standard identification assumptions used to disentangle supply and demand shocks may not be valid in environments in which agents learn from prices.
Subjects: 
expectations
animal spirits
incomplete information
JEL: 
D82
D83
E3
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2775-8
Document Type: 
Working Paper

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