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Learning about informational rigidities from sectoral data and diffusion indices

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  • Pierre-Daniel G. Sarte

Abstract

This paper uses sectoral data to study survey-based diffusion indices designed to capture changes in the business cycle in real time. The empirical framework recognizes that when answering survey questions regarding their firm's output, respondents potentially rely on infrequently updated information. The analysis then suggests that their answers reflect considerable information lags, on the order of 16 months on average. Moreover, because information stickiness leads respondents to filter out noisy output fluctuations when answering surveys, it helps explain why diffusion indices successfully track business cycles and their consequent widespread use. Conversely, the analysis shows that in a world populated by fully informed identical firms, as in the standard RBC framework for example, diffusion indices would instead be degenerate. Finally, the data suggest that information regarding changes in aggregate output tends to be sectorally concentrated. The paper, therefore, is able to offer basic guidelines for the design of surveys used to construct diffusion indices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 10-09.

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Date of creation: 2010
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Handle: RePEc:fip:fedrwp:10-09

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  1. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116 - 159.
  2. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2008. "Sectoral vs. aggregate shocks : a structural factor analysis of industrial production," Working Paper 08-07, Federal Reserve Bank of Richmond.
  3. M. Hashem Pesaran & Martin Weale, 2005. "Survey Expectations," IEPR Working Papers 05.30, Institute of Economic Policy Research (IEPR).
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  5. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  6. Reis, Ricardo, 2005. "Inattentive Producers," CEPR Discussion Papers 5393, C.E.P.R. Discussion Papers.
  7. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  8. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  9. Dean Croushore, 2008. "Frontiers of real-time data analysis," Working Papers 08-4, Federal Reserve Bank of Philadelphia.
  10. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," Harvard Institute of Economic Research Working Papers 2111, Harvard - Institute of Economic Research.
  11. Jeong, Jinook & Maddala, G S, 1996. "Testing the Rationality of Survey Data Using the Weighted Double-Bootstrapped Method of Moments," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 296-302, May.
  12. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
  13. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  14. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  15. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
  16. Ivaldi, Marc, 1992. "Survey Evidence on the Rationality of Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 225-41, July-Sept.
  17. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
  18. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  19. Vasco M Carvalho, 2008. "Aggregate Fluctuations and the Network Structure of Intersectoral Trade," 2008 Meeting Papers 1062, Society for Economic Dynamics.
  20. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," NBER Working Papers 9796, National Bureau of Economic Research, Inc.
  21. N. Gregory Mankiw & Ricardo Reis, 2007. "Sticky Information in General Equilibrium," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 603-613, 04-05.
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