DP4076 The Informational Role of the Business Cycle

Author(s): Harris Dellas
Publication Date: October 2003
Keyword(s): business cycles, comparative advantage, incomplete information, matching, stabilization
JEL(s): D83, E32, E60
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4076

Economic decisions such as occupational and entrepreneurial choices may violate true comparative advantage when economic agents are uncertain about which activity best matches their talents. If relative performance varies over the business cycle (for instance, if downturns affect disproportionately those who are pursuing the wrong activity), then economic fluctuations may affect the probability and persistence of resource mismatches. The present work offers a novel, informational perspective to the business cycle and provides a link between aggregate fluctuations and the long-term allocation of resources.