Expectations matter for economic activity. To the extent that they are fundamentally unwarranted, they represent "undue optimism or pessimism" (Pigou, 1927). In this paper, we identify empirically the effect of undue optimism/pessism ("optimism shocks") on economic activity. In a first step, we...

We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks...

The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission...

We show that TFP reacts counter-cyclically to macroeconomic shocks, which we identify by imposing sign restrictions. Counterfactual simulations, based on a New Keynesian DSGE model, show that firms manage to employ labor more efficiently during downturns, which leads to a muted drop in the...

This paper provides a theory of financial frictions as a transmission mechanism for primitive shocks to translate into aggregate TFP fluctuations. In our model, financial frictions distort existing capital allocation across different production units, rather than investment in new capital. News...

We develop a theory linking “misallocation,” i.e., dispersion in static marginal products of capital (MPK), to systematic investment risks. In our setup, firms differ in their exposure to these risks, which we show leads naturally to heterogeneity in firm-level risk premia and, more...

We assess whether “undue optimism” (Pigou) contributes to business cycle fluctuations. In our analysis, optimism (or pessimism) pertains to total factor productivity, which determines economic activity in the long run. Optimism shocks are perceived changes in productivity that do not...

This paper documents highly persistent effects of financial crises on output, labor productivity and employment in a sample of emerging economies. To address these facts, it introduces a quantitative macroeconomic model that includes endogenous TFP growth through firm creation. Firm creators...

This paper explores the importance of investment-specific technology changes in anticipated TFP fluctuations. To this end, we identify two types of news shocks with the maximum forecast error variance approach: news shocks to TFP and news shocks to the relative price of investment. We show in a...

The present paper contributes to the limited literature on the job reallocation dynamics in Indian manufacturing. The study is based on annual data from the Annual Survey of Industries for the years 2000-01 to 2014-15. The study finds job reallocation to be significantly high. Gross job...