Information-Driven Business Cycles: A Primal Approach
54 Pages Posted: 9 Mar 2018
Date Written: December 11, 2017
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.
Keywords: Business cycle, dispersed information, DSGE models, information-robust characterization, primal approach, sentiments
JEL Classification: E32, D84
Suggested Citation: Suggested Citation