Pigouvian Cycles

Current and expected unemployment rates contain information that is highly useful to estimate the effect of news about TFP and to allow a general equilibrium rational expectations model to generate Pigouvian cycles: a large fraction of the comovement of output, consumption, investment, employment, and real wages is explained by noise about TFP. These results emerge because of the low-frequency negative relationship between unemployment and TFP growth. The model predicts that the start (end ) of most US recessions is associated with agents realizing that previous enthusiastic (lukewarm) expectations about future TFP would not be met. (JEL E21, E22, E23, E24, E32, E43, E52)