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Do noisy data exacerbate cyclical volatility?

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  • Antulio N. Bomfim
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    Abstract

    How does the additional uncertainty associated with noisy economic data affect business cycle fluctuations? I use a simple variant of the neoclassical growth model to show that the answer depends crucially on the assumed expectation-formation capabilities of agents. Under efficient signal extracting, noisy economic indicators dampen cyclical volatility. The opposite occurs when agents follow a simple bounded rational strategy.

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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199950/199950abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199950/199950pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-50.

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    Date of creation: 1999
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    Handle: RePEc:fip:fedgfe:1999-50

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    Related research

    Keywords: Economic indicators ; Business cycles ; Rational expectations (Economic theory);

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    1. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
    2. Francis X. Diebold & Glenn D. Rudebusch, 1989. "Forecasting output with the composite leading index: an ex ante analysis," Finance and Economics Discussion Series 90, Board of Governors of the Federal Reserve System (U.S.).
    3. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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