We calibrate and simulate the model's response to `demand' shocks such as shifts in the marginal efficiency of investment, government spending shocks and news shocks. We show that investment-specific shocks can generate business cycle fluctuations that are broadly consistent with aggregate data.

This paper considers a framework in which the central bank observes a potentially large set of noisy indicators but is uncertain about the state of the economy. We evaluate the welfare implications of exploiting all available information to assess the state of the economy. We show that it is...

expectations? We find that the answer to both questions is negative: Standard medium scale DSGE models have difficulties explaining the evolution of inflation expectations, and that the fit is even worse when we introduce imperfect information.