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Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model

  • Manoj Atolia

    ()

    (Florida State University)

  • Ryan Chahrour

    ()

    (Boston College)

What do firms learn from their interactions in markets, and what are the implications for aggregate dynamics? We address this question in a multi-sector real-business cycle model with a sparse input-output structure. In each sector, firms observe their own productivity, along with the prices of their inputs and the price of their output. We show that general equilibrium market-clearing conditions place heavy constraints on average expectations, and characterize a set of cases where average expectations (and average dynamics) are exactly those of the full-information model. This "aggregate irrelevance" of information can occur even when sectoral expectations and dynamics are quite different under partial information, and despite the fact that each sector represents a non-negligible portion of the overall economy. In numerical examples, we show that even when the conditions for aggregate irrelevance of information are not met, aggregate dynamics remain nearly identical to the full-information model under reasonable calibrations.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 832.

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Date of creation: 16 Sep 2013
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Handle: RePEc:boc:bocoec:832
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