DP13370 Pigouvian Cycles

Author(s): Renato Faccini, Leonardo Melosi
Publication Date: December 2018
Date Revised: April 2019
Keyword(s): Bayesian estimation, employment gap, Identification of shocks, labor market trends, noise shocks, TFP news, the Great Recession
JEL(s): C11, C51, E32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13370

Low-frequency variations in current and expected unemployment rates are important to identify TFP news shocks and to allow a general equilibrium rational expectations model to generate Pigouvian cycles: a large fraction of the comovement of output, consumption, investment, employment, and real wages is explained by changes in expectations unrelated to TFP fundamentals. The model predicts that the start (end) of most U.S. recessions is associated with agents realizing that previous enthusiastic (lukewarm) expectations about future TFP would not be met.