A nonlinear model of the business cycle

There is now a great deal of empirical evidence that business cycle fluctua tions contain asymmetries. I focus on a theoretical model intended to captu re the nonlinear behavior of aggregate output following a large negative sh ock. Nonlinearity introduced by Bayesian updating and an information extern ality produces an economy in which the response to large negative shocks is an increase in future output. The expansionary effect is produced by the n egative shock imparting information about what not to do.