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Aggregate shocks or aggregate information? Costly information and business cycle comovement

  • Veldkamp, Laura
  • Wolfers, Justin

Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous work examined production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost of production and a low marginal cost of replication, sectors can share the cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated productions choices. By filtering out sector-specific shocks and transmitting aggregate ones, information markets amplify business-cycle comovement.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 54 (2007)
Issue (Month): Supplement 1 (September)
Pages: 37-55

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Handle: RePEc:eee:moneco:v:54:y:2007:i:sup1:p:37-55
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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