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Information-driven Business Cycles: A Primal Approach

Author

Listed:
  • Ryan Chahrour

    (Boston College)

  • Robert Ulbricht

    (Toulouse School of Economics)

Abstract

We develop a methodology to characterize equilibrium in DSGE models, free of parametric restrictions on information. First, we define a “primal” economy in which deviations from full information are captured by wedges in agents' expectations. Then, we provide conditions ensuring some information-structure can implement these wedges. We apply the approach to estimate a business cycle model where firms and households have dispersed information. The estimated model fits the data, attributing the majority of fluctuations to a single shock to households' expectations. The responses are consistent with an implementation in which households become optimistic about local productivities and gradually learn about others' optimism.

Suggested Citation

  • Ryan Chahrour & Robert Ulbricht, 2018. "Information-driven Business Cycles: A Primal Approach," 2018 Meeting Papers 240, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:240
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    References listed on IDEAS

    as
    1. Bergemann, Dirk & Morris, Stephen, 2016. "Bayes correlated equilibrium and the comparison of information structures in games," Theoretical Economics, Econometric Society, vol. 11(2), May.
    2. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    3. Zhen Huo & Jess Benhabib & Sushant Acharya, 2017. "The Anatomy of Sentiment-driven Fluctuations," 2017 Meeting Papers 513, Society for Economic Dynamics.
    4. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
    5. Kevin X.D. Huang & Zheng Liu & Louis Phaneuf, 2004. "Why Does the Cyclical Behavior of Real Wages Change Over Time?," American Economic Review, American Economic Association, vol. 94(4), pages 836-856, September.
    6. Hansen, Lars Peter & Sargent, Thomas J., 1981. "A note on Wiener-Kolmogorov prediction formulas for rational expectations models," Economics Letters, Elsevier, vol. 8(3), pages 255-260.
    7. Gorodnichenko, Yuriy & Ng, Serena, 2010. "Estimation of DSGE models when the data are persistent," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 325-340, April.
    8. Todd Walker, 2017. "Confounding Dynamics," 2017 Meeting Papers 141, Society for Economic Dynamics.
    9. Ryan Chahrour & Robert Ulbricht, 2017. "Information-driven Business Cycles: A Primal Approach," Boston College Working Papers in Economics 925, Boston College Department of Economics.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Information-driven Business Cycles: A Primal Approach
      by Christian Zimmermann in NEP-DGE blog on 2017-04-12 08:14:56

    Citations

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    Cited by:

    1. Chahrour, Ryan & Gaballo, Gaetano, 2017. "Learning from prices: amplication and business fluctuations," Working Paper Series 2053, European Central Bank.
    2. Ryan Chahrour & Robert Ulbricht, 2017. "Information-driven Business Cycles: A Primal Approach," Boston College Working Papers in Economics 925, Boston College Department of Economics.
    3. Ambrocio, Gene, 2019. "Measuring household uncertainty in EU countries," Research Discussion Papers 17/2019, Bank of Finland.
    4. Chahrour, Ryan & Ulbricht, Robert, 2018. "Robust Predictions for DSGE Models with Incomplete Information," TSE Working Papers 18-971, Toulouse School of Economics (TSE), revised Mar 2019.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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