News and knowledge capital

We show that a model with knowledge capital can generate business cycles driven by expectations of future movement in total factor productivity (TFP). These cycles are characterized by a boom in which consumption, investment, output and hours-worked all rise in advance of any movement in TFP. We mod...

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Bibliographic Details
Published inReview of economic dynamics Vol. 14; no. 1; pp. 92 - 101
Main Authors Gunn, Christopher M., Johri, Alok
Format Journal Article
LanguageEnglish
Published Orlando Academic Press 01.01.2011
Subjects
Asset pricing
Business cycles
Consumption
Economic models
Economic shock
Expectation
Information society
Investment
Knowledge
Macroeconomics
News
Productivity
Studies
Total factor productivity
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Summary:We show that a model with knowledge capital can generate business cycles driven by expectations of future movement in total factor productivity (TFP). These cycles are characterized by a boom in which consumption, investment, output and hours-worked all rise in advance of any movement in TFP. We model knowledge capital as an input into production which is endogenously produced through a learning-by-doing process. When firms receive news of an impending productivity increase, the value of knowledge capital rises, inducing the firm to hire more hours to "invest" in knowledge capital. The rise in the value of knowledge capital immediately raises the value of the firm, causing an appreciation in share prices, a feature that has empirical support. The increase in output of the firm allows both consumption and investment to rise despite the absence of any contemporaneous productivity shock. If the expected increase in productivity fails to materialize, the model generates a recession as well as a crash in the stock market. [PUBLICATION ABSTRACT]
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2010.07.003