Confidence and the Propagation of Demand Shocks
<jats:title>Abstract</jats:title> <jats:p>We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. Th...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
| Published: |
Oxford University Press (OUP)
2022
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| Online Access: | https://hdl.handle.net/1721.1/144443 |
| _version_ | 1826196957141401600 |
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| author | Angeletos, George-Marios Lian, Chen |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Angeletos, George-Marios Lian, Chen |
| author_sort | Angeletos, George-Marios |
| collection | MIT |
| description | <jats:title>Abstract</jats:title>
<jats:p>We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in aggregate demand without nominal rigidity. The second introduces a “confidence multiplier,” that is, a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. This mechanism amplifies the business-cycle fluctuations triggered by demand shocks (but not necessarily those triggered by supply shocks); it helps investment to comove with consumption; and it allows front-loaded fiscal stimuli to crowd in private spending.</jats:p> |
| first_indexed | 2024-09-23T10:40:15Z |
| format | Article |
| id | mit-1721.1/144443 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T10:40:15Z |
| publishDate | 2022 |
| publisher | Oxford University Press (OUP) |
| record_format | dspace |
| spelling | mit-1721.1/1444432023-12-08T17:21:39Z Confidence and the Propagation of Demand Shocks Angeletos, George-Marios Lian, Chen Massachusetts Institute of Technology. Department of Economics <jats:title>Abstract</jats:title> <jats:p>We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in aggregate demand without nominal rigidity. The second introduces a “confidence multiplier,” that is, a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. This mechanism amplifies the business-cycle fluctuations triggered by demand shocks (but not necessarily those triggered by supply shocks); it helps investment to comove with consumption; and it allows front-loaded fiscal stimuli to crowd in private spending.</jats:p> 2022-08-25T17:20:07Z 2022-08-25T17:20:07Z 2022 2022-08-25T16:31:37Z Article http://purl.org/eprint/type/JournalArticle https://hdl.handle.net/1721.1/144443 Angeletos, George-Marios and Lian, Chen. 2022. "Confidence and the Propagation of Demand Shocks." Review of Economic Studies, 89 (3). en 10.1093/RESTUD/RDAB064 Review of Economic Studies Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press (OUP) NBER |
| spellingShingle | Angeletos, George-Marios Lian, Chen Confidence and the Propagation of Demand Shocks |
| title | Confidence and the Propagation of Demand Shocks |
| title_full | Confidence and the Propagation of Demand Shocks |
| title_fullStr | Confidence and the Propagation of Demand Shocks |
| title_full_unstemmed | Confidence and the Propagation of Demand Shocks |
| title_short | Confidence and the Propagation of Demand Shocks |
| title_sort | confidence and the propagation of demand shocks |
| url | https://hdl.handle.net/1721.1/144443 |
| work_keys_str_mv | AT angeletosgeorgemarios confidenceandthepropagationofdemandshocks AT lianchen confidenceandthepropagationofdemandshocks |