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Imperfect Information and the Business Cycle

  • Fabrice Collard

    ()

    (School of Economics, University of Adelaide)

  • Harris Dellas

    ()

    (Department of Economics, University of Bern)

  • Frank Smets

    ()

    (European Central Bank
    CEPR
    Ghent University)

Imperfect information has played a prominent role in modern business cycle theory. We assess its importance by estimating the New Keynesian (NK) model under alternative informational assumptions. One version focuses on confusion between temporary and persistent disturbances. Another, on unobserved variation in the inflation target of the central bank. A third on persistent misperceptions of the state of the economy (measurement error). And a fourth assumes perfect information (the standard NK-DSGE version). We find that imperfect information contains considerable explanatory power for business fluctuations. Signal extraction seems to provide a conceptually satisfactory, empirically plausible and quantitatively important business cycle mechanism.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2009-15.pdf
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Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2009-15.

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Length: 60 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:adl:wpaper:2009-15
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  1. Martin Eichenbaum & Jonas D. M. Fisher, 2003. "Testing the Calvo model of sticky prices," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  3. Fabrice Collard & Harris Dellas, 2009. "Monetary Misperceptions, Output and Inflation Dynamics," School of Economics Working Papers 2009-23, University of Adelaide, School of Economics.
  4. Lippi, Francesco & Neri, Stefano, 2007. "Information variables for monetary policy in an estimated structural model of the euro area," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1256-1270, May.
  5. Dellas, Harris, 2006. "Monetary Shocks and Inflation Dynamics in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 543-551, March.
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  13. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
  14. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  15. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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  17. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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