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Moderating noise-driven macroeconomic fluctuations under dispersed information

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  • Adams, Jonathan J.

Abstract

Can aggregate noise shocks produce large macroeconomic fluctuations, and if so, is there anything that policymakers can do about them? Yes and yes, if news about idiosyncratic fundamentals is contaminated by aggregate noise. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large fluctuations in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.

Suggested Citation

  • Adams, Jonathan J., 2023. "Moderating noise-driven macroeconomic fluctuations under dispersed information," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:dyncon:v:156:y:2023:i:c:s0165188923001586
    DOI: 10.1016/j.jedc.2023.104752
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    Cited by:

    1. Jonathan J Adams, 2024. "Optimal Policy Without Rational Expectations: A Sufficient Statistic Solution," Working Papers 001011, University of Florida, Department of Economics.

    More about this item

    Keywords

    Noise shocks; Bubbles; Sentiments; Incomplete information; Heterogeneous beliefs; Business cycles; Optimal policy;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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