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Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement

  • Laura Veldkamp
  • Justin Wolfers

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12557.

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Date of creation: Oct 2006
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Publication status: published as Veldkamp, Laura & Wolfers, Justin, 2007. "Aggregate shocks or aggregate information? Costly information and business cycle comovement," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 37-55, September.
Handle: RePEc:nbr:nberwo:12557
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