News about aggregate demand and the business cycle

•We study a model with variable capital utilization and increasing returns-to-scale.•Business cycles are driven by news shocks to consumption or public expenditures.•The model yields qualitatively and quantitatively realistic cyclical fluctuations.•Anticipated aggregate or investment-specific technology shocks are also considered.•The intertemporal substitution effect needs to be strengthened in this case.

The plausibility of expectations-driven cyclical fluctuations in an otherwise standard one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale in production is examined. Due to a dominating wealth effect, our model is able to generate qualitatively as well as quantitatively realistic aggregate fluctuations driven by news impulses to future consumption demand or government spending on goods and services. When the economy is subject to anticipated total factor productivity or investment-specific technology shocks, the relative strength of the intertemporal substitution effect needs to be enhanced for our model to exhibit positive macroeconomic co-movement and business cycle statistics that are consistent with the data.