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A news-driven business cycle is a positive comovement in consumption, labor, investment, and output caused by positive news about the future. Standard real business cycle models do not generate it. In this paper, we find that a used market friction – i.e., sticky prices – can be a source of news-driven business cycles from news about future technology growth, technology level, and expansionary monetary policy shocks. The key mechanism is the countercyclical movements of markups through nominal rigidities.
Published Online: 2010-9-9
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
