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Do noisy data exacerbate cyclical volatility?

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Author Info
Antulio N. Bomfim
Abstract

How does the additional uncertainty associated with noisy economic data affect business cycle fluctuations? I use a simple variant of the neoclassical growth model to show that the answer depends crucially on the assumed expectation-formation capabilities of agents. Under efficient signal extracting, noisy economic indicators dampen cyclical volatility. The opposite occurs when agents follow a simple bounded rational strategy.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-50.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-50

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Related research
Keywords: Economic indicators ; Business cycles ; Rational expectations (Economic theory);

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  1. Francis X. Diebold & Glenn D. Rudebusch, 1989. "Forecasting output with the composite leading index: an ex ante analysis," Finance and Economics Discussion Series 90, Board of Governors of the Federal Reserve System (U.S.).
  2. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
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  3. Kennedy, James, 1993. "An Analysis of Revisions to the Industrial Production Index," Applied Economics, Taylor and Francis Journals, vol. 25(2), pages 213-19, February.
  4. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
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This page was last updated on 2009-11-7.

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