Noisy Business Cycles

56 Pages Posted: 26 May 2009 Last revised: 5 Aug 2010

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

Multiple version iconThere are 2 versions of this paper

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)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-251b
Cambridge, MA 02142
United States
617-452-3859 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jennifer La'O

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
83
Abstract Views
886
rank
187,762
PlumX Metrics