Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement
29 Pages Posted: 13 Oct 2008
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Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement
Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement
Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement
Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement
Date Written: January 2007
Abstract
Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous work examined production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost ofproduction and a low marginal cost of replication, sectors can share the cost of acquiring aggregate information, rather than each paying the full production cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated production choices. By filtering out sector-specific shocks and transmitting aggregate ones, informationmarkets amplify business-cycle comovement.
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