Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement

29 Pages Posted: 13 Oct 2008

See all articles by Laura Veldkamp

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Justin Wolfers

University of Michigan at Ann Arbor - Department of Economics; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; The University of Sydney - Discipline of Economics; Brookings Institution - Economic Studies Program; Peterson Institute for International Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Kiel Institute for the World Economy

Multiple version iconThere are 4 versions of this paper

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.

Suggested Citation

Veldkamp, Laura and Wolfers, Justin, Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement (January 2007). NYU Working Paper No. 2451/26074, Available at SSRN: https://ssrn.com/abstract=1281956

Laura Veldkamp (Contact Author)

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Justin Wolfers

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