We calibrate and simulate the model's response to `demand' shocks such as shifts in the marginal efficiency of investment, government spending shocks and news shocks. We show that investment-specific shocks can generate business cycle fluctuations that are broadly consistent with aggregate data.

expectations? We find that the answer to both questions is negative: Standard medium scale DSGE models have difficulties explaining the evolution of inflation expectations, and that the fit is even worse when we introduce imperfect information.