A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives.
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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number
08018.
Length: 38 pages Date of creation: Jun 2008 Date of revision: Handle: RePEc:eti:dpaper:08018
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Robert D. Dittmar & William T. Gavin & Finn E. Kydland, 2005.
"Inflation Persistence And Flexible Prices,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 245-261, 02.
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