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Information Flows and Aggregate Persistence

  • Oleksiy Kryvtsov

    ()

    (public Bank of Canada)

This paper studies the effect of imperfect information on aggregate output and price dynamics. I argue that imperfect information can lead monetary shocks to have persistent real effects. In the environment with unobserved aggregate (monetary) and real demand shocks, price-setting agents face fixed costs of updating to full information. Between full updating, agents use market prices and quantities to infer the state of the economy. The economy is more informative if (a) the fraction of fully updating agents is high; (b) shocks to the money supply are more volatile than the sector-specific shocks; and (c) the degree of real rigidity is small. I find that the effect of monetary shocks on output and inflation is bigger in economy that is less informative. Dynamics in uninformative economies can be well approximated by the equilibrium where signals convey no information, as in Mankiw and Reis (2002).

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 416.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:416
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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
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  4. Christian Hellwig & Laura Veldkamp, 2006. "Knowing what others Know: Coordination motives in information acquisition," 2006 Meeting Papers 361, Society for Economic Dynamics.
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  17. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
  18. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  19. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
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