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EXPECTATION ERRORS IN CREDIT MARKET AND BUSINESS CYCLES

Published online by Cambridge University Press:  30 June 2016

Kenichi Tamegawa  and
Shin Fukuda
Kenichi Tamegawa*
Affiliation:
Yamagata University
Shin Fukuda
Affiliation:
Fukushima University
*
Address correspondence to: Kenichi Tamegawa, Faculty of Literature and Social Sciences, Yamagata University, Kojirakawa-machi, Yamagata-shi, Yamagata 990–8560, Japan; e-mail: tamegawa@human.kj.yamagata-u.ac.jp.
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Abstract

This study demonstrates how expectation errors in a credit market generate economic fluctuations. To this end, we employ simulation analysis using a dynamic stochastic general equilibrium model. Our model includes two building blocks that are not included in the standard models: the banking sector and matching friction in the labor market. By introducing the banking sector, we can confirm that if economic agents fallaciously expect a rise in future asset prices, such expectations will cause an economic boom and bust. The variation of this fluctuation is quite large and the recession short-lived, but these drawbacks can be avoided by adding matching friction.

Keywords

Expectation ErrorsNews ShockBusiness CycleBank CapitalUnemployment
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1359 - 1380
Copyright
Copyright © Cambridge University Press 2016 

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