A Theory of Demand Shocks

By Guido Lorenzoni. 2009

605 citations recorded by the source corpus.

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The shock to this public signal, or "news shock," has the features of an aggregate demand shock: it increases output, employment and inflation in the short run and has no effects in the long run. The dynamics of the economy following an aggregate productivity shock are also affected by the presence of imperfect information: after a productivity shock output adjusts gradually to its higher long-run level, and there is a temporary negative effect on inflation and employment. A calibrated version of the model is able to generate realistic amounts of short-run volatility due to demand shocks, in line with existing time-series evidence. The paper also develops a simple method to solve forward-looking models with dispersed information.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/5bfe856e705d52fdc2ed9185ea7e3b83daa0763c

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In Economics and Econometrics

Citations in the corpus

Confidence and the Transmission of Government Spending Shocks (2012, background): “We find that confidence is irrelevant in the transmission of government spending shocks to output in normal times, but is apparently very important during downturns.”
No News in Business Cycles (2014, positive): “A recent noticeable exception is Lorenzoni (2009), where agents can only observe technology ‘news’ disturbed by an aggregate ‘noise’.”
News Driven Business Cycles: Insights and Challenges (2014, neutral): “See Lütkepohl [2012] for a formal presentation. See also Alessi, Barigozzi, and Capasso [2008] for a review of non-fundamentalness and identification in structural VAR models.”
Endogenous Liquidity and the Business Cycle (2015, result): “Similar countervailing forces are also obtained in other models with financial frictions as, for example, Lorenzoni and Walentin [2009]. Robustness.”
Business Cycle Dynamics Under Rational Inattention (2015, neutral): “The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the European Central Bank.”
Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination (2016, positive): “17The same statement applies to the baseline model in Lorenzoni (2009): the key mechanism in that paper rests on the uncertainty consumers face about future fundamentals (TFP) and the deviation of monetary policy from replicating flexibleprice allocations.”
Informational Frictions and Commodity Markets (2015, background): “A key feature of the baseline model is that the commodity market is not only a place for market participants to trade the commodity but also a platform to aggregate private information about the strength of the global economy, which ultimately determines the global demand for the commodity.”
Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion (2010, neutral): “= 1 N P0 + N − 1 N E [( ξt−ξ̂i,t|t )( ξt−ξ̂k,t|t )′] , (22)”
Expectations and Investment (2015, positive): “…in macroeconomics considers expectations “shocks”, and discusses the extent to which they can contribute to economic fluctuations (Beaudry and Portier (2004); Angeletos and La’O (2009); Lorenzoni (2009); Barsky and Sims (2012); Angeletos and La’O (2013); Levchenko and Pandalai-Nayar (2015)).”
Covid-19 Coronavirus and Macroeconomic Policy (2020, positive): “Weak aggregate demand, conversely, depresses the return to 3This effect is well known from the literature on news shocks (e.g., Lorenzoni, 2009). investment.”