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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| Published in | Review of economic dynamics Vol. 14; no. 1; pp. 92 - 101 |
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| Main Authors | , |
| Format | Journal Article |
| Language | English |
| Published |
Orlando
Academic Press
01.01.2011
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| Subjects | |
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| Abstract | 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] |
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| AbstractList | 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] 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. All rights reserved, Elsevier |
| Author | Gunn, Christopher M. Johri, Alok |
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| Cites_doi | 10.1086/431289 10.3386/w14950 10.1257/000282802762024601 10.2307/2555771 10.1016/j.red.2009.03.001 10.1016/j.jmoneco.2003.10.003 10.1016/j.jedc.2006.09.008 10.1086/260879 10.1016/j.jinteco.2008.07.003 10.1257/aer.90.4.1034 10.1086/261968 10.3386/w7534 10.1257/aer.96.4.1293 10.3386/w15029 10.3386/w14215 10.1086/261888 10.1016/S0304-3932(02)00180-0 10.2307/1880798 |
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