Noisy Business Cycles
This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and—potentially—shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Book chapter |
| Language: | en_US |
| Published: |
University of Chicago Press
2010
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| Online Access: | http://hdl.handle.net/1721.1/52398 https://orcid.org/0000-0002-9269-5094 |
| Summary: | This paper investigates a real-business-cycle economy that features dispersed information
about the underlying aggregate productivity shocks, taste shocks, and—potentially—shocks to
monopoly power. We show how the dispersion of information can (i) contribute to significant
inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative shortrun
response of employment to productivity shocks; (iii) imply that productivity shocks explain
only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the
business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and
(vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none
of these properties requires significant uncertainty about the underlying fundamentals: they
rest on the heterogeneity of information and the strength of trade linkages in the economy, not
the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart
from undoing monopoly distortions or providing the agents with more information, no policy
intervention can improve upon the equilibrium allocations. |
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