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News and knowledge capital

Author

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  • Alok Johri

    (McMaster University)

  • Christopher Gunn

    (McMaster University)

Abstract

We explore the ability of a model with knowledge capital to generate expectations-driven business cycles. Knowledge capital is an input in production which is endogenously produced through a learning-by-doing process. We show that a standard real business cycle model augmented with only a learning-by-doing technology can exhibit an expectations-driven business cycle in response to news about a future change in total factor productivity. News about future productivity immediately increases the value of knowledge. This induces agents to accumulate knowledge now by working harder. The ensuing expansion of output is sufficient that both current consumption and investment can increase above steady state levels despite the absence of any contemporaneous productivity shock. Moreover, if knowledge capital is accumulated by firms the boom in real variables is accompanied by an appreciation in the price of equity shares, a feature that has empirical support.
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Suggested Citation

  • Alok Johri & Christopher Gunn, 2009. "News and knowledge capital," 2009 Meeting Papers 763, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:763
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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