Animal spirits as an engine of boom-busts and throttle of productivity growth

Gunn, Christopher M.

doi:10.1016/j.jedc.2015.05.001

Cited by 2 publications

(1 citation statement)

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“…Unlike these models, we focus on news about the return on a financial variable in a model where bank capital plays a crucial role in transmitting news shocks to the real economy. The focus on financial news as a source of business cycles is shared by Gunn andJohri (2011b, 2013) in fairly different closed economy contexts. Gertler and Karadi (2011) study unrealized news shocks to capital quality in a closed economy monetary model with leverage-constrained banks.…”

Section: Introductionmentioning

confidence: 99%

Financial News, Banks, and Business Cycles

Gunn

Johri

2016

Macroecon. Dynam.

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In a model where banks face a capital sufficiency requirement, we demonstrate that news about a fall in the expected return on a portfolio of international long bonds held by a bank leads to an immediate and persistent fall in economic activity. Even if the news never materializes, economic activity falls below steady state for several periods, followed by a recovery. The portfolio adjustment induced by the capital sufficiency requirements leads to a rise in loan rates and tighter credit conditions, which trigger the fall in activity. We contribute to the news-shock literature by showing that imperfect signals about future financial returns can create business cycles without relying on the usual suspects—shocks to technology, preferences, or fiscal policy—and to the emerging economy business cycle literature in that disturbances in world financial markets can cause domestic business cycles without shocks to the world interest rate or to country spreads.

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Section: Introductionmentioning

confidence: 99%