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Man-bites-dog business cycles

Listed author(s):
  • Kristoffer Nimark

    (CREI)

The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. We present a tractable model that features an information structure in which some types of signals are more likely to be observed after unusual events. Counterintuitively, more signals may then increase uncertainty. When embedded in a simple business cycle model, the proposed information structure can help us understand why we observe (i) large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of expectations as measured by survey data. These results are consequences of optimal updating by agents when the availability of some signals is positively correlated with tail-events. The model is estimated by likelihood based methods using raw survey data and a quarterly time series of total factor productivity along with standard aggregate time series. The estimated model suggests that there have been episodes in recent US history when the impact on output of innovations to productivity of a given magnitude were up to twice as large compared to normal times.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_127.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 127.

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Date of creation: 2012
Handle: RePEc:red:sed012:127
Contact details of provider: Postal:
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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  1. Kristoffer Nimark, 2007. "Dynamic Pricing and Imperfect Common Knowledge," RBA Research Discussion Papers rdp2007-12, Reserve Bank of Australia.
  2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  3. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  4. Alejandro Justiniano & Giorgio E. Primiceri, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," NBER Working Papers 12022, National Bureau of Economic Research, Inc.
  5. Alan S. Blinder & Alan B. Krueger, 2004. "What Does the Public Know about Economic Policy, and How Does It Know It?," NBER Working Papers 10787, National Bureau of Economic Research, Inc.
  6. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun, pages -.
  8. Matějka, Filip, 2015. "Rigid pricing and rationally inattentive consumer," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 656-678.
  9. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
  10. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
  11. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  12. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," NBER Working Papers 16537, National Bureau of Economic Research, Inc.
  13. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  14. Fernández-Villaverde, Jesús & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco, 2012. "Estimating Dynamic Equilibrium Models with Stochastic Volatility," CEPR Discussion Papers 9130, C.E.P.R. Discussion Papers.
  15. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
  16. Bhar, Ramaprasad & Hamori, Shigeyuki, 2003. "Alternative characterization of the volatility in the growth rate of real GDP," Japan and the World Economy, Elsevier, vol. 15(2), pages 223-231, April.
  17. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-2084, December.
  18. repec:pri:indrel:dsp01j3860693b is not listed on IDEAS
  19. Liam Graham & Stephen Wright, 2009. "Information, heterogeneity and market incompleteness," Kiel Working Papers 1503, Kiel Institute for the World Economy.
  20. repec:pri:cepsud:99blinderkrueger is not listed on IDEAS
  21. Michael Rousakis, 2013. "Expectations and Fluctuations: The Role of Monetary Policy," 2013 Meeting Papers 681, Society for Economic Dynamics.
  22. Péter Kondor, 2012. "The More We Know about the Fundamental, the Less We Agree on the Price," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1175-1207.
  23. George-Marios Angeletos & Jennifer La'O, 2009. "Incomplete Information, Higher-Order Beliefs and Price Inertia," NBER Working Papers 15003, National Bureau of Economic Research, Inc.
  24. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
  25. Chib, Siddhartha, 2001. "Markov chain Monte Carlo methods: computation and inference," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 57, pages 3569-3649 Elsevier.
  26. Angeletos, George-Marios & La’O, Jennifer, 2009. "Incomplete information, higher-order beliefs and price inertia," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 19-37.
  27. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  28. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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