Expectations and Business Cycle Dynamics

Recent research has highlighted the importance of information, or expectations, regarding economic fundamentals, and has argued that changes in these expectations are related to business cycle fluctuations. The focus of much of this research has been on the possibility of expectations-driven business cycles, that is, on the possibility that news or perceptions about future economic fundamentals, such as productivity, generate positive co-movement between key current macroeconomic variables. Research has progressed to show, for example, that some forms of behavioural biases and shocks to expectations can be important sources of business cycle fluctuations in neoclassical models. On the other hand, the related question of agents' expectations formation mechanism can be an equally important factor for the key characteristics of business cycles and should therefore be placed high in the research agenda on business cycle fluctuations.