Expectations, Inter-sectorial Relationships and the Business Cycle

Abstract

This paper presents a stochastic dynamic general equilibrium model calibrated for Venezuela that incorporates inter-sectorial relationships. With this model it is possible to assess the impact on the aggregate economic activity generated by productivity shocks or demand shocks to a specific sector and/or how changes at the aggregate level could affect the sectorial activity. The model is used to evaluate the aggregate and sectorial responses to shocks of different nature, under diverse assumptions about the inter-sectorial relationships and expectations formation. The results suggest that the omission of inter-sectorial relations and inadequate treatment of expectations can produce unrealistic results or dynamics. In quantitative terms, the omission of rational expectations seems to be less critical. However, this could change in an environment with more frictions.

JEL classification: B23 ; C11 ; C15 ; C50 ; D50 ; D52