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Behavioral Theories of the Business Cycle, Journal of the European Economic Association

Abstract

We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and verconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.

Type

Article

Author(s)

Nir Jamovich, Sergio Rebelo

Date Published

2007

Citations

Jamovich, Nir, and Sergio Rebelo. 2007. Behavioral Theories of the Business Cycle. Journal of the European Economic Association. 5(2-3): 361-368.

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