The Macro and Asset Pricing Implications of Fluctuating Information Quality
43 Pages Posted: 10 Jan 2020 Last revised: 21 Aug 2020
Date Written: December 20, 2019
I study the macroeconomic and asset pricing implications of variations in information quality in a real business cycle model. Learning and fluctuating information quality generate changes in the perception of macroeconomic outcomes, but do not modify the distribution of realized shocks. On the asset pricing side, the model generates stock market crashes that are disconnected from the fundamental shocks of the economy. Deterioration in the quality of information predicts spikes in macroeconomic and financial uncertainty. Consistent with the data, shocks to information quality forecast downside risk in macroeconomic aggregates like output and investment growth.
Keywords: Information Quality, Constant-Gain Learning, Stock Market Crashes, Macro and Financial Uncertainty, Downside risk
JEL Classification: E2, E3, G12
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