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Noisy Business Cycles

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  • George-Marios Angeletos
  • Jennifer La'O

Abstract

This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and, potentially, shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14982.

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Date of creation: May 2009
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Publication status: published as Noisy Business Cycles , George-Marios Angeletos, Jennifer La'O. in NBER Macroeconomics Annual 2009, Volume 24 , Acemoglu, Rogoff, and Woodford. 2010
Handle: RePEc:nbr:nberwo:14982

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  1. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  2. Laura Veldkamp, 2003. "Learning Asymmetries in Real Business Cycles," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 03-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  4. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 223-251.
  5. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  6. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  7. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 768, Board of Governors of the Federal Reserve System (U.S.).
  8. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics, EconWPA 0505011, EconWPA, revised 03 Jun 2005.
  9. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003, Society for Computational Economics 263, Society for Computational Economics.
  10. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper, Federal Reserve Bank of Richmond 01-02, Federal Reserve Bank of Richmond.
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  12. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 118(5), pages 866 - 907.
  13. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5877, C.E.P.R. Discussion Papers.
  14. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series, European Central Bank 0955, European Central Bank.
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  17. Jordi Galí & Pau Rabanal, 2005. "Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2004, Volume 19, pages 225-318 National Bureau of Economic Research, Inc.
  18. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(10), pages 2003-2035, September.
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Cited by:
  1. Forni, Mario & Gambetti, Luca & Lippi, Marco & Sala, Luca, 2013. "Noise Bubbles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9532, C.E.P.R. Discussion Papers.
  2. Luo, Yulei & Nie, Jun & Young, Eric R., 2014. "Robust control, informational frictions, and international consumption correlations," European Economic Review, Elsevier, Elsevier, vol. 67(C), pages 1-27.
  3. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 984, University of Warwick, Department of Economics.
  4. Ernesto Pasten, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," 2012 Meeting Papers, Society for Economic Dynamics 346, Society for Economic Dynamics.
  5. Amberger, Korie, 2013. "The Role of Capital on Noise Shocks," MPRA Paper 46483, University Library of Munich, Germany.
  6. Tille, Cédric & van Wincoop, Eric, 2014. "Solving DSGE portfolio choice models with dispersed private information," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 40(C), pages 1-24.
  7. Yulei Luo & Jun Nie & Eric R. Young, 2010. "Robustness, information-processing constraints, and the current account in small open economies," Research Working Paper, Federal Reserve Bank of Kansas City RWP 10-17, Federal Reserve Bank of Kansas City.
  8. George-Marios Angeletos & Jennifer La'O, 2009. "Incomplete Information, Higher-Order Beliefs and Price Inertia," NBER Working Papers 15003, National Bureau of Economic Research, Inc.
  9. Mario Forni & Luca Gambetti & Marco Lippi & Luca Sala, 2014. "Noisy News in Business Cycles," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 097, University of Modena and Reggio E., Dept. of Economics.
  10. Michael Rousakis, 2013. "Expectations and Fluctuations: The Role of Monetary Policy," 2013 Meeting Papers, Society for Economic Dynamics 681, Society for Economic Dynamics.
  11. Andrew Williams, 2014. "The effect of transparency on output volatility," Economics of Governance, Springer, Springer, vol. 15(2), pages 101-129, May.
  12. Graham, Liam & Wright, Stephen, 2010. "Information, heterogeneity and market incompleteness," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(2), pages 164-174, March.
  13. George-Marios Angeletos & Luigi Iovino & Jennifer La'O, 2011. "Cycles, Gaps, and the Social Value of Information," NBER Working Papers 17229, National Bureau of Economic Research, Inc.
  14. F. Pancotto & G. Pignataro & D. Raggi, 2014. "Higher order beliefs and the dynamics of exchange rates," Working Papers wp957, Dipartimento Scienze Economiche, Universita' di Bologna.

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