Gold rush fever in business cycles

► Postwar U.S. data show that in a consumption-output vector autoregression, consumption is almost entirely explained by the permanent shock to the system at all horizons, while the temporary shock does explain quite a lot of the short run fluctuations of output. ► To explain those facts, a flexible price model of the business cycle is proposed, in which fluctuations are driven primarily by inefficient movements in investment around a stochastic trend. ► A boom in the model arises when investors rush to exploit new market opportunities even though the resulting investments simply crowd out the value of previous investments. ► A metaphor for such profit driven fluctuations are gold rushes, as they are periods of economic boom associated with expenditures aimed at securing claims near new found veins of gold. ► We show that an attractive feature of the model is to provide a simple structural interpretation of the data properties we have highlighted.