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A Likelihood Analysis of Models with Information Frictions

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  • Leonardo Melosi

    (University of Pennsylvania)

Abstract

This paper develops a dynamic stochastic general equilibrium model where firms are imperfectly informed. We estimate the model through likelihood-based methods and find that it can explain the highly persistent real effects of monetary disturbances that are documented by a benchmark VAR. The model of imperfect information nests a model of rational inattention where firms optimally choose the variances of signal noise, subject to an information-processing constraint. We present an econometric procedure to evaluate the predictions of this rational inattention model. Implementing this procedure delivers insights on how to improve the fit of rational inattention models.

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  • Leonardo Melosi, 2009. "A Likelihood Analysis of Models with Information Frictions," 2009 Meeting Papers 1034, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1034
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    References listed on IDEAS

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    Cited by:

    1. Yulei Luo & Eric R. Young, 2016. "Long‐Run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 325-362, March.
    2. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.
    3. Luigi Iovino & Jennifer La'O & George-Marios Angeletos, 2015. "The Social Value of Information in a Business-Cycle Model," 2015 Meeting Papers 1299, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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