Working Paper: CEPR ID: DP7643
Authors: Fabrice Collard; Harris Dellas; Frank Smets
Abstract: Imperfect information has played a prominent role in modern business cycle theory. This paper assesses its importance by estimating the New Keynesian (NK) model under alternative informational assumptions. One version focuses on confusion between temporary and persistent disturbances. Another, on unobserved variation in the inflation target of the central bank. A third on persistent misperceptions of the state of the economy (measurement error). And a fourth assumes perfect information (the standard NK{DSGE version). Imperfect information is found to contain considerable explanatory power for business fluctuations. Signal extraction seems to provide a conceptually satisfactory, empirically plausible and quantitatively important business cycle mechanism.
Keywords: Bayesian estimation; Imperfect information; New Keynesian model; Signal extraction
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Imperfect Information (D83) | Enhanced Explanatory Power of the New Keynesian Model (E12) |
| Imperfect Information (D83) | Economic Fluctuations (E32) |
| Misperceptions of Nominal Aggregates (E19) | Confusion Between Nominal and Relative Prices (P22) |
| Misperceptions (D83) | Inertia in Inflation Dynamics (E31) |
| Misperceptions (D83) | Persistent Dynamics in Economic Behavior (D11) |
| Signal Extraction Problems (C51) | Economic Dynamics (E19) |
| Imperfect Information (D83) | Substitution for Real Rigidities and Backward Indexation (C54) |
| Estimated Noise Levels in Signal Extraction Problem (C20) | Real-World Measurement Errors (C83) |