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Information Flows and Aggregate Persistence

  • Oleksiy Kryvtsov

    (Bank of Canada)

I construct a quantitative equilibrium model in which price-setting agents have imperfect information about the state of the economy. The model is used to ask whether monetary shocks can generate persistent movements in output. In the model agents obtain information from two sources: costly updating to full information and costless learning from publicly observed prices and quantities. In equilibrium, the number of informed agents and the forecasting ability of the uninformed agents are endogenously determined. Persistent output fluctuations require that market prices and quantities are uninformative in the sense that, on average, agents' forecast errors are large and change slowly. I find that for a wide range of parameter values, market prices and quantities are informative. Thus, under rational expectations, imperfect information by itself cannot generate business cycle fluctuations.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 708.

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Date of creation: 2007
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Handle: RePEc:red:sed007:708
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