Advertising and Business Cycle Fluctuations

This paper provides new empirical evidence for quarterly U.S. aggregate advertising expenditures, showing that advertising has a well defined pattern over the Business Cycle. To understand this pattern we develop a general equilibrium model where targeted advertising increases the marginal utility of the advertised good. Advertising intensity is endogenously determined by profit maximizing firms. We embed this assumption into an otherwise standard model of the business cycle with monopolistic competition. We find that advertising affects the aggregate dynamics in a relevant way, and it exacerbates the welfare costs of fluctuations for the consumer. Finally, we provide estimates of our setup using Bayesian techniques