ABSTRACT By modifying slightly a standard neoclassical-synthesis macroeconomic model, this paper investigates the effects of an adverse supply or demand shock on output, employment, investment, prices, interest rates, and the exchange rate. The paper focuses on the possibility of the magnification of these effects by the media, the politicians, and the political analysts, who induce herd behavior by overstating the size of the shock. I find that such behavior destabilizes the economy by magnifying the amplitude of the business cycle and by hurting private investment, which might cause expansions to be shorter and contractions to last longer.
Cite this paper
nullD. Hatzinikolaou, "How to Turn a Recession into a Depression: The Role of the Media, of the Politicians, and of the Political Analysts," Modern Economy, Vol. 1 No. 3, 2010, pp. 144-148. doi: 10.4236/me.2010.13016.
 S. Mullainathan and A. Shleifer, “Media Bias,” NBER Working Paper 9295, Cambridge, MA, 2002.
K. J. Alsem, S. Brakman, L. Hoogduin and G. Kuper, “The Impact of Newspapers on Consumer Confidence: Does Spin Bias Exist?” Applied Economics, Vol. 40, No. 5, 2008, pp. 531-539.
R. J. Shiller, “Conversation, Information, and Herd Be- havior,” American Economic Review, Vol. 85, No. 2, 1995, pp. 181-185.
J. Conlisk, “Why Bounded Rationality?” Journal of Eco- nomic Literature, Vol. 34, No. 1, 1996, pp. 669-700 (a).
G. W. Evans and G. Ramey, “Adaptive Expectations, Underparameterization and the Lucas Critique,” Journal of Monetary Economics, Vol. 53, No. 2, 2006, pp. 249-264.
J. Conlisk, “Bounded Rationality and Market Fluctua- tions,” Journal of Economic Behavior and Organization, Vol. 29, No. 2, 1996, pp. 233-250 (b).
V. Castro, “The Duration of Economic Expansions and Recessions: More than Duration Dependence,” Journal of Macroeconomics, Vol. 32, No. 1, 2010, pp. 347-365.
E. L. Groshen and S. Potter, “Has Structural Change Contributed to a Jobless Recovery? Federal Reserve Bank of New York,” Current Issues in Economics and Finance, Vol. 9, No. 8, 2003, pp. 1-7.