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Imperfect Information and the Business Cycle

Author

Listed:
  • Fabrice Collard

    (School of Economics, University of Adelaide)

  • Harris Dellas

    (Department of Economics, University of Bern)

  • Frank Smets

    (European Central Bank
    CEPR
    Ghent University)

Abstract

Imperfect information has played a prominent role in modern business cycle theory. We assess its importance by estimating the New Keynesian (NK) model under alternative informational assumptions. One version focuses on confusion between temporary and persistent disturbances. Another, on unobserved variation in the inflation target of the central bank. A third on persistent misperceptions of the state of the economy (measurement error). And a fourth assumes perfect information (the standard NK-DSGE version). We find that imperfect information contains considerable explanatory power for business fluctuations. Signal extraction seems to provide a conceptually satisfactory, empirically plausible and quantitatively important business cycle mechanism.

Suggested Citation

  • Fabrice Collard & Harris Dellas & Frank Smets, 2009. "Imperfect Information and the Business Cycle," School of Economics and Public Policy Working Papers 2009-15, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2009-15
    as

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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2009-15.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    New Keynesian model; imperfect information; signal extraction; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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