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Learning Asymmetries in Real Business Cycles

Authors: Veldkamp, Laura
Keywords: learning;asymmetry;business cycles;uncertainty
Issue Date: 3-Jul-2003
Series/Report no.: EC-03-21
Abstract: When an economic boom ends, the downturn is generally sharp and short. When growth resumes, the boom is more gradual. Our explanation for this pattern rests on learning about productivity. When agents believe productivity is high, they work, invest, and produce more. More production generates higher precision information. When the economy passes the peak of a productivity boom, precise estimates of the slowdown prompt quick, decisive reactions: Investment and labor fall sharply. At the end of a slump, low production yields noisy estimates of the recovery. The noise impedes learning, slows the recovery, and makes booms more gradual than crashes. A calibrated model generates asymmetry in growth rates similar to macroeconomic aggregates. Fluctuations in agents’ forecast precision match observed countercyclical dispersion in analysts’ macroeconomic forecasts. “There is, however, another characteristic of what we call the trade cycle that our explanation must cover; namely, the phenomenon of the crisis the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently , whereas there is, as a rule, no such sharp turning point when an upward is substituted for a downward tendency.” J.M. Keynes (1936).
Appears in Collections:Economics Working Papers

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