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Consumer misperceptions, uncertain fundamentals, and the business cycle

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  • Hürtgen, Patrick

Abstract

This paper estimates the importance of shocks to consumer misperceptions “noise shocks” for U.S. business cycle fluctuations. I embed imperfect information as in Lorenzoni (2009) into a Smets and Wouters (2007)-type DSGE model. Agents only observe aggregate productivity and a signal about the permanent component contaminated with noise. Based on this information agents form beliefs about the temporary and the permanent component of productivity. Shocks to the signal (noise shocks) trigger aggregate fluctuations unrelated to changes in productivity. Bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations. Nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks. These features help to resolve conflicting results in the previous literature.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 40 (2014)
Issue (Month): C ()
Pages: 279-292

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Handle: RePEc:eee:dyncon:v:40:y:2014:i:c:p:279-292

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Imperfect information; Noise shocks; Aggregate fluctuations; Bayesian estimation; Bayesian model comparison;

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Consumer Misperceptions, Uncertain Fundamentals, and the Business Cycle
    by Christian Zimmermann in NEP-DGE blog on 2011-08-11 21:13:06
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Cited by:
  1. Enders, Zeno & Kleemann, Michael & Müller, Gernot, 2013. "Growth expectations, undue optimism, and short-run fluctuations," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80009, Verein für Socialpolitik / German Economic Association.

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