Abstract
Abstract Traditionally, observed fluctuations in aggregate economic time series have been mainly modeled as being the result of exogenous disturbances. A better understanding of macroeconomic phenomena, however, surely requires looking directly at the relations between variables that may trigger endogenous nonlinearities. Several attempts to justify endogenous business cycles have appeared in the literature in the last few years, involving many types of different settings. This paper intends to contribute to such literature by investigating how we can modify the well-known information stickiness macro model, through the introduction of a couple of reasonable new assumptions, in order to trigger the emergence of endogenous fluctuations.
Highlights
The benchmark macroeconomic paradigm is one in which the relations between relevant variables are essentially linear
Business cycles receive an endogenous explanation and are traced back to the strong nonlinear deterministic structure that can pervade the economic system. This is di¤ erent from the exogenous approach to economic ‡uctuations, based on the assumption that economic equilibria are determinate and intrinsically stable, so that in the absence of continuing exogenous shocks the economy tends towards a steady state, but because of stochastic shocks a stationary pattern of ‡uctuations is observed.’
The result in proposition 1 indicates that the way we approach information updating or the degree of information stickiness is not relevant for the model’s dynamics as long as we maintain that agents formulate expectations under perfect foresight
Summary
The benchmark macroeconomic paradigm is one in which the relations between relevant variables are essentially linear. The changes will appear later with the characterization of the model and they are essentially two: 1) the degree of information stickiness will be the same across the di¤erent types of economic agents (namely, price-setting ...rms, households who formulate consumption plans and wage-setting workers); 2) the monetary policy rule will ignore real stabilization, and it will focus solely on price stability (this allows to better highlight the condition under which monetary policy is active or aggressive) Besides these remarks, we should stress that any kind of stochastic disturbance (e.g., technological innovations) will be overlooked, in order to emphasize the possible presence of endogenous ‡uctuations.
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