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On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment

Guo, Jang-Ting and Sirbu, Anca-Ioana and Suen, Richard M. H. (2010): On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment.

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Abstract

Eusepi (2009, International Journal of Economic Theory 5, pp. 9-23) analytically finds that a one-sector real business cycle model may exhibit positive co-movement between consumption and investment when the equilibrium wage-hours locus is positively-sloped and steeper than the household's labor supply curve. However, we show that this condition does not imply expectations-driven business cycles will emerge in Eusepi's model. Specifically, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period.

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