The news-shock literature interprets empirical news-shock identifications as signals about future productivity. Under this view, changes in productivity cause changes in expectations. I investigate an alternative interpretation whereby changes in expectations cause changes in productivity. I present a model where firms adopt the technology of a deterministic frontier, and where self-fulfilling expectational-shocks unleash a frenzy of adoption through which firms increase productivity. Consistent with the news evidence, stock prices and aggregate activity boom, yet TFP increases with a lag. Simulations using i.i.d. expectational-shocks yield moments consistent with the data, and qualitatively capture both high-frequency boom-busts as well as lower-frequency fluctuations. Finally, estimating a Beaudry-Portier style VECM on the simulated model output to identify a \news shock" recovers impulse response functions largely consistent with the Beaudry and Portier (2006) results.

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Department of Economics
Carleton Economics Working Papers (CEWP)
Department of Economics

Gunn, C. (2013). Animal Spirits as an Engine of Boom-Busts and Throttle of Productivity Growth (No. CEP 13-04). Carleton Economics Working Papers (CEWP). Department of Economics.