Research

Published and unpublished papers by Wei Xiao

Explaining Speculative Expansions

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Published in Contributions to Macroeconomics, Vol. 4: No. 1, article 7 (2004).  Download working paper version.

In this paper we use a modified neoclassical business cycle model to test two competing explanations of the expansion of the 1990s. The model can have indeterminate, multiple equilibria that give rise to expectation-driven business cycles. We fit into the model series of estimated speculative and productivity shocks and compare its predictions with empirical data. Our results suggest that the speculation hypothesis has more explanatory power than the productivity hypothesis in terms of matching the data. Speculative behavior of investors, therefore, may have contributed to the investment boom, the prolonged expansion, and the subsequent recession of the period 1991-2001.

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Written by wxiao

January 21, 2009 at 6:01 pm

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