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Imperfect Information and the Business Cycle

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Author Info

  • 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.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2009-15.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2009-15.

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Length: 60 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:adl:wpaper:2009-15

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Web page: http://www.economics.adelaide.edu.au/
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Keywords: New Keynesian model; imperfect information; signal extraction; Bayesian estimation;

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References

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  1. Collard, Fabrice & Dellas, Harris, 2010. "Monetary Misperceptions, Output and Inflation Dynamics," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7644, C.E.P.R. Discussion Papers.
  2. Dellas, Harris, 2006. "Monetary Shocks and Inflation Dynamics in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(2), pages 543-551, March.
  3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  4. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 665-690, April.
  5. Lippi, Francesco & Neri, Stefano, 2007. "Information variables for monetary policy in an estimated structural model of the euro area," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1256-1270, May.
  6. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  7. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports, Federal Reserve Bank of New York 270, Federal Reserve Bank of New York.
  8. de Walque, G. & Smets, F. & Wouters, R., 2005. "Price setting in General Equilibrium: Alternative Specifications," Computing in Economics and Finance 2005, Society for Computational Economics 370, Society for Computational Economics.
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Citations

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Cited by:
  1. Delis, Manthos D & Kouretas, Georgios & Tsoumas, Chris, 2011. "Anxious periods and bank lending," MPRA Paper 32422, University Library of Munich, Germany.
  2. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  3. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers, School of Economics, University of Surrey 1012, School of Economics, University of Surrey.
  4. Frank Smets & Kai Christoffel & Günter Coenen & Roberto Motto & Massimo Rostagno, 2010. "DSGE models and their use at the ECB," SERIEs, Spanish Economic Association, Spanish Economic Association, vol. 1(1), pages 51-65, March.
  5. Vega, Hugo, 2010. "Total factor productivity and signal noise volatility in an incomplete information setting," Working Papers, Banco Central de Reserva del Perú 2010-014, Banco Central de Reserva del Perú.
  6. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.

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