Noisy Business Cycles
This paper investigates a real-business-cycle economy that features dispersed informationabout the underlying aggregate productivity shocks, taste shocks, and—potentially—shocks tomonopoly power. We show how the dispersion of information can (i) contribute to significantinertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative shortrunresponse of employment to productivity shocks; (iii) imply that productivity shocks explainonly a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in thebusiness cycle; (v) formalize a certain type of demand shocks within an RBC economy; and(vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, noneof these properties requires significant uncertainty about the underlying fundamentals: theyrest on the heterogeneity of information and the strength of trade linkages in the economy, notthe level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apartfrom undoing monopoly distortions or providing the agents with more information, no policyintervention can improve upon the equilibrium allocations.
Year of publication: |
2009-07
|
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Authors: | Angeletos, George-Marios ; La'O, Jennifer |
Publisher: |
University of Chicago Press |
Saved in:
freely available
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