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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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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
Date of revision:
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
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