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A Likelihood Analysis of Models with Information Frictions

  • Leonardo Melosi

    (University of Pennsylvania)

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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File URL: https://economicdynamics.org/meetpapers/2009/paper_1034.pdf
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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1034.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1034
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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