Noisy business cycles

George Marios Angeletos*, Jennifer La'O

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

79 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)319-378
Number of pages60
JournalNBER Macroeconomics Annual
Volume24
StatePublished - 2009

Keywords

  • Business cycles
  • Fluctuations
  • Heterogeneous information
  • Higher-order beliefs
  • Informational frictions
  • Noise
  • Strategic complementarity

ASJC Scopus subject areas

  • Economics and Econometrics

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