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Noisy Business Cycles

  • George-Marios Angeletos
  • Jennifer La'O

This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and, potentially, shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations.

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File URL: http://www.nber.org/papers/w14982.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14982.

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Date of creation: May 2009
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Publication status: published as Noisy Business Cycles , George-Marios Angeletos, Jennifer La'O. in NBER Macroeconomics Annual 2009, Volume 24 , Acemoglu, Rogoff, and Woodford. 2010
Handle: RePEc:nbr:nberwo:14982
Note: EFG ME
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  1. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003 263, Society for Computational Economics.
  2. Jordi Galí & Pau Rabanal, 2005. "Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 225-318 National Bureau of Economic Research, Inc.
  3. Hellwig, Christian & Veldkamp, Laura, 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition," CEPR Discussion Papers 6506, C.E.P.R. Discussion Papers.
  4. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  5. Mirko Wiederholt & Bartosz Mackowiak, 2005. "Optimal Sticky Prices under Rational Inattention," 2005 Meeting Papers 369, Society for Economic Dynamics.
  6. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  7. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  8. repec:ste:nystbu:08-21 is not listed on IDEAS
  9. Manuel Amador & Pierre-Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," NBER Working Papers 14255, National Bureau of Economic Research, Inc.
  10. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics 0505011, EconWPA, revised 03 Jun 2005.
  11. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  12. Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series 1331, European Central Bank.
  13. Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers 260, Society for Economic Dynamics.
  14. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  15. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  16. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2003-2035, September.
  17. Ben S. Bernanke & Julio J. Rotemberg, 1997. "Editorial in "NBER Macroeconomics Annual 1997, Volume 12"," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 1-6 National Bureau of Economic Research, Inc.
  18. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  19. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
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