Discussion paper

DP13370 Pigouvian Cycles

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.


Melosi, L and R Faccini (2018), ‘DP13370 Pigouvian Cycles‘, CEPR Discussion Paper No. 13370. CEPR Press, Paris & London. https://cepr.org/publications/dp13370