Noisy Business Cycles

56 Pages Posted: 26 May 2009 Last revised: 10 Dec 2022

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Jennifer La'O

University of Chicago - Booth School of Business

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Date Written: May 2009

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 short-run 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.

Suggested Citation

Angeletos, George-Marios and La'O, Jennifer, Noisy Business Cycles (May 2009). NBER Working Paper No. w14982, Available at SSRN: https://ssrn.com/abstract=1408902

George-Marios Angeletos (Contact Author)

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Jennifer La'O

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