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On the role of expectations in Costa Rican business cycle: an econometric research

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  • Gómez-Trejos, Felipe A.
Abstract
Expectations formation of future output fluctuations as a factor for explaining Costa Rican business cycle is the main subject addressed in this paper. The main contribution of this research is the proposition of an econometric model for estimating the effect that an increase in the next quarter expected real GDP has on current quarterly real GDP level. To this end, a dynamic stochastic general equilibrium model is used as the theoretical base for explaining the nature of the causality relationship between expected output variability and economic fluctuations. Furthermore, a state-space representation of a Rational Expectations (R.E.) model is developed for constructing an expectations updating mechanism which fully characterizes the dynamics of the expected output variability. This investigation concludes that a 1% increase in the next quarter’s expected GDP is predicted to generate, on average, an approximate 0.67% growth on current quarterly GDP (in real terms). From this modeling perspective, the econometric analysis concludes this effect is statistically significant and also identifies other relevant factors for explaining Costa Rican business cycle, such as the forecasts of economics variables that determine output fluctuations throughout time.

Suggested Citation

  • Gómez-Trejos, Felipe A., 2014. "On the role of expectations in Costa Rican business cycle: an econometric research," Revista de Ciencias Económicas, Instituto de Investigaciones en Ciencias Económicas, Universidad de Costa Rica, vol. 32(1), January.
    • Handle: RePEc:rce:rvceco:15052
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    File URL: https://revistas.ucr.ac.cr/index.php/economicas/article/view/15052
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