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 and 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.

Additional Metadata
Keywords Expectations-driven business cycle, Intangible capital, Multiple equilibria, News shock, Sunspot, Technological adoption
Persistent URL dx.doi.org/10.1016/j.jedc.2015.05.001
Journal Journal of Economic Dynamics and Control
Citation
Gunn, C. (2015). Animal spirits as an engine of boom-busts and throttle of productivity growth. Journal of Economic Dynamics and Control, 57, 24–53. doi:10.1016/j.jedc.2015.05.001