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A Likelihood Analysis of Models with Information Frictions

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Author Info
Leonardo Melosi () (Department of Economics, University of Pennsylvania)

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Abstract

This paper develops a dynamic stochastic general equilibrium model where firms are imperfectly informed. We estimate the model through likelihood-based methods and find that it can explain the highly persistent real effects of monetary disturbances that are documented by a benchmark VAR. The model of imperfect information nests a model of rational inattention where firms optimally choose the variances of signal noise, subject to an information-processing constraint. We present an econometric procedure to evaluate the predictions of this rational inattention model. Implementing this procedure delivers insights on how to improve the fit of rational inattention models.

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Publisher Info
Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 09-009.

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Length: 48 pages
Date of creation: 27 Feb 2009
Date of revision:
Handle: RePEc:pen:papers:09-009

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Related research
Keywords: Imperfect common knowledge; rational inattention; Bayesian econometrics; real effects of nominal shocks; VAR identification;

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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