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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. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  2. David E. Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2010. "Firm-specific capital, nominal rigidities and the business cycle," International Finance Discussion Papers 990, Board of Governors of the Federal Reserve System (U.S.).
  3. Marco Bonomo & Carlos Carvalho, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Macroeconomics 0402005, EconWPA, revised 19 May 2005.
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  5. Hellwig, Christian & Veldkamp, Laura, 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition," CEPR Discussion Papers 6506, C.E.P.R. Discussion Papers.
  6. Khan, Hashmat & Zhu, Zhenhua, 2006. "Estimates of the Sticky-Information Phillips Curve for the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 195-207, February.
  7. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  8. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
  9. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  10. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  11. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004 277, Society for Computational Economics.
  12. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  13. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  14. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  15. Olivier Coibion & Yuriy Gorodnichenko, 2008. "What Can Survey Forecasts Tell Us About Informational Rigidities?," NBER Working Papers 14586, National Bureau of Economic Research, Inc.
  16. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  17. N. Gregory Mankiw & Ricardo Augusto Marc Rocha Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," Yale School of Management Working Papers ysm391, Yale School of Management.
  18. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices 09-191, Review of Economic Dynamics.
  19. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 269-298.
  20. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
  21. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  22. 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.
  23. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  24. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
  25. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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