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Measurement error in general equilibrium: the aggregate effects of noisy economic indicators

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Author Info
Antulio N. Bomfim
Abstract

I analyze the business cycle implications of noisy economic indicators in the context of a dynamic general equilibrium model. Two main results emerge. First, measurement error in preliminary data releases can have a quantitatively important effect on economic fluctuations. For instance, under efficient signal-extraction, the introduction of accurate economic indicators would make aggregate output 10 to 30 percent more volatile than suggested by the post-war experience of the U.S. economy. Second, the sign---but not the magnitude---of the measurement error effect depends crucially on the signal processing capabilities of agents. In particular, if agents take the noisy data at face value, significant improvements in the quality of key economic indicators would lead to considerably less cyclical volatility.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-54.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-54

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Keywords: Economic indicators ; Business cycles;

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  2. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  3. Susanto Basu & John G. Fernald, 1999. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis. [Downloadable!]
  5. repec:fth:coluec:431 is not listed on IDEAS
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  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  8. Robert G. King, 1995. "Quantitative theory and econometrics," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-105. [Downloadable!]
  9. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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  10. Kennedy, James, 1993. "An Analysis of Revisions to the Industrial Production Index," Applied Economics, Taylor and Francis Journals, vol. 25(2), pages 213-19, February.
  11. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. Caballero, R.J. & Lyons, R.K., 1989. "The Role Of External Economies In U.S. Manufacturing," Discussion Papers 1989_14, Columbia University, Department of Economics.
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