Data Management

Noisy Business Cycles

Date Added: May 2009
Format: PDF

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. The authors show how the dispersion of information can contribute to significant inertia in the response of macroeconomic outcomes to such shocks; induce a negative short-run response of employment to productivity shocks; imply that productivity shocks explain only a small fraction of high-frequency fluctuations; contribute to significant noise in the business cycle; formalize a certain type of demand shocks within an RBC economy; and generate cyclical variation in observed Solow residuals and labor wedges.