On Expectations-Driven Business Cycles in Economies with Production Externalities: A Comment

Eusepi (2009, International Journal of Economic Theory 5, pp. 9-23) analytically Önds that a one-sector real business cycle model may exhibit positive co-movement between con- sumption and investment when the equilibrium wage-hours locus is positively-sloped and steeper than the householdiÌs labor supply curve. However, we show that this condition does not imply expectations-driven business cycles will emerge in EusepiiÌs model. SpeciÖcally, a positive news shock about future productivity improvement leads to an aggregate recession whereby output, employment, consumption and investment all fall in the announcement period.