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Imperfect information and the business cycle

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  • Dellas, Harris
  • Smets, Frank
  • Collard, Fabrice

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.

Suggested Citation

  • Dellas, Harris & Smets, Frank & Collard, Fabrice, 2010. "Imperfect information and the business cycle," CEPR Discussion Papers 7643, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7643
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    More about this item

    Keywords

    Bayesian estimation; Imperfect information; New keynesian model; Signal extraction;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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