Countercyclical markups and news-driven business cycles

The standard one-sector real business cycle model is unable to generate expectations-driven fluctuations. The addition of countercyclical markups and modest investment adjustment costs offers an easy fix to this conundrum. The simulated model replicates the regular features of U.S. aggregate fluctuations.

► The real business cycle model is extended by countercyclical markups.
► News-driven fluctuations arise with markups that are within empirically plausible ranges.
► The simulated model replicates the regular features of U.S. aggregate fluctuations.