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Shocks and Business Cycles

Author

Listed:
  • Frankel, David M.
  • Burdzy, Krzysztof

Abstract

A popular theory of business cycles is that they are driven by animal spirits: shifts in expectations brought on by sunspots. A prominent example is Howitt and McAfee (AER, 1992). We show that this model has a unique equilibrium if there are payoff shocks of any size. This equilibrium still has the desirable property that recessions and expansions can occur without any large exogenous shocks. We give an algorithm for computing the equilibrium and study its comparative statics properties. This work generalizes Burdzy, Frankel, and Pauzner (2000) to the case of endogenous frictions and seasonal and mean-reverting shocks.

Suggested Citation

  • Frankel, David M. & Burdzy, Krzysztof, 2005. "Shocks and Business Cycles," Staff General Research Papers Archive 12274, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12274
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    Cited by:

    1. Frankel, David M., 2012. "Recurrent crises in global games," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 309-321.
    2. David M. Frankel, 2010. "Rent Seeking and Economic Fragility," Levine's Bibliography 661465000000000159, UCLA Department of Economics.
    3. Frankel, David M., 2010. "Shocks and Crises in the Long Run," Staff General Research Papers Archive 31687, Iowa State University, Department of Economics.
    4. Guimaraes, Bernardo & Machado, Caio, 2013. "Demand expectations and the timing of stimulus policies," MPRA Paper 48895, University Library of Munich, Germany.
    5. Bernardo Guimaraes & Gabriel Jardanovski, 2022. "Who matters in dynamic coordination problems?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 452-469, June.
    6. Levin Jonathan, 2009. "The Dynamics of Collective Reputation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, August.
    7. Frankel, David M., 2017. "Efficient ex-ante stabilization of firms," Journal of Economic Theory, Elsevier, vol. 170(C), pages 112-144.
    8. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    9. Daisuke Oyama, 2004. "Booms And Slumps In A Game Of Sequential Investment With The Changing Fundamentals," The Japanese Economic Review, Japanese Economic Association, vol. 55(3), pages 311-320, September.
    10. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    11. Steiner, Jakub, 2008. "Coordination cycles," Games and Economic Behavior, Elsevier, vol. 63(1), pages 308-327, May.
    12. Guimaraes, Bernardo & Pereira, Ana Elisa, 2017. "Dynamic coordination among heterogeneous agents," Journal of Mathematical Economics, Elsevier, vol. 73(C), pages 13-33.
    13. Bernardo Guimaraes & Caio Machado & Ana E. Pereira, 2020. "Dynamic coordination with timing frictions: Theory and applications," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 656-697, June.
    14. Guimaraes, Bernardo & Pereira, Ana Elisa, 2016. "QWERTY is efficient," Journal of Economic Theory, Elsevier, vol. 163(C), pages 819-825.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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