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Optimal Rules under Adjustment Cost and Infrequent Information

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Author Info
Rene Garcia
Marco Bonomo

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Abstract

A large number of microeconomic decision variables such as investments, prices, inventories or employment are characterized by intermittent large adjustments. The behavior of those variables has been often modeled as following state-dependent rules. The optimality of such state-dependent rules depends crucially on the continuous observation of the relevant state, an assumption which is far from being fulfilled in practice. We propose an alternative model, where at least part of information about the relevant state variable is infrequent. We study several alternatives. We start with the special case where innovations are infrequent, but are readily observed. Only in this case are optimal rules state-dependent. We then explore the common case of infrequent and delayed information. It may arrive at deterministic times, like periodic macroeconomic statistics, or stochastically, when some events trigger announcements. Part of the relevant information may be continuously observed, while the other part is only observed infrequently. The resulting rules are time and state dependent, characterized by trigger and target points that are functions of the time spent since the last time of information arrival. We derive the conditions which characterize the optimal rules and provide numerical algorithms for each case

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 135.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:135

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Related research
Keywords: Adjustment costs; Infrequent information; Optimal rules;

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
G1 - Financial Economics - - General Financial Markets

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  2. Almeida Neto, Heitor Vieira de & Bonomo, Marco Antônio Cesar, 1999. "Optimal State-Dependent Rules, Credibility, and Inflation Inertia," Economics Working Papers (Ensaios Economicos da EPGE) 349, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
    Other versions:
  3. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November. [Downloadable!] (restricted)
    Other versions:
  4. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  5. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September. [Downloadable!] (restricted)
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  8. Marco Bonomo & René Garcia, 2001. "The macroeconomic effects of infrequent information with adjustment costs," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 18-35, February. [Downloadable!] (restricted)
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  9. Caballero, R.J., 1989. "Time Dependent Rules, Aggregate Stickiness And Information Externalities," Discussion Papers 1989_11, Columbia University, Department of Economics.
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  12. Carvalho, Carlos Viana de & Bonomo, Marco Antônio Cesar, 1999. "Endogenous Time-Dependent Rules and Inflation Inertia," Economics Working Papers (Ensaios Economicos da EPGE) 348, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
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  13. Marcelo Veracierto, 1997. "Plant level irreversible investment and equilibrium business cycles," Discussion Paper / Institute for Empirical Macroeconomics 115, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  14. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April. [Downloadable!] (restricted)
  15. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers 1990_20, Columbia University, Department of Economics.
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  16. Laurence Ball & N. Gregory Mankiw, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," NBER Working Papers 4089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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