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Macroeconomics Subject to Informational Frictions

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Pennsylvania Convention Center, 102-A
Hosted By: Econometric Society

Information-driven Business Cycles: A Primal Approach

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.

The Anatomy of Sentiment-driven Fluctuations

Sushant Acharya
,
Federal Reserve Bank of New York
Jess Benhabib
,
New York University
Zhen Huo
,
Yale University

Abstract

We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments - self- fulfilling changes in beliefs that are orthogonal to fundamentals and exogenous noise - can drive aggregate fluctuations. We show that, under rational expectations, there exists a continuum of sentiment-driven equilibria that generate aggregate fluctuations. Without having to take a stance on the private information agents might possess, we provide a general characterization of necessary and sufficient conditions under which a change in sentiments can have prolonged effects on aggregate outcomes and when it can only have short-lived effects. In addition, we also provide a practical way to characterize these equilibria.

Price Setting Under Uncertainty About Inflation

Andres Drenik
,
Columbia University
Diego Perez
,
New York University

Abstract

We use the manipulation of inflation statistics that occurred in Argentina starting in 2007 to test the relevance of informational frictions in price setting. We estimate that the manipulation of statistics had associated a higher degree of price dispersion. This effect is analyzed in the context of a quantitative general equilibrium model in which firms use information about the inflation rate to set prices. Consistent with empirical evidence, we find that monetary policy becomes more effective with less precise information about inflation. Not reporting accurate measures of the CPI entails significant welfare losses, especially in economies with volatile monetary policy.

The Ramsey Problem with Informationally-sticky Nominal Wages

Luigi Iovino
,
Bocconi University
Jennifer La'O
,
Columbia University

Abstract

We study a class of economies in which incomplete information is the source of nominal price, nominal wage, and real quantity frictions. Firms make nominal price-setting and real production decisions under imperfect information about the state of the economy; workers make nominal wage-setting and real human capital investment decisions under imperfect information. We show how one may apply the Ramsey method even when agents face informational frictions and we characterize optimal fiscal and monetary policy within this class.
JEL Classifications
  • A1 - General Economics