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Cycles, Gaps, and the Social Value of Information

  • George-Marios Angeletos
  • Luigi Iovino
  • Jennifer La'O

What are the welfare effects of the information contained in macroeconomic statistics, central-bank communications, or news in the media? We address this question in a business-cycle framework that nests the neoclassical core of modern DSGE models. Earlier lessons that were based on "beauty contests" (Morris and Shin, 2002) are found to be inapplicable. Instead, the social value of information is shown to hinge on essentially the same conditions as the optimality of output stabilization policies. More precise information is unambiguously welfare-improving as long as the business cycle is driven primarily by technology and preference shocks--but can be detrimental when shocks to markups and wedges cause sufficient volatility in "output gaps." A numerical exploration suggests that the first scenario is more plausible.

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Date of creation: 20 Oct 2011
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Handle: RePEc:cla:levarc:786969000000000293
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