monetary policy and aggregate volatility abstract discretionary conduct of monetary stabilization policy can increase real and nominal aggregate volatility by arbitrary amounts when firms pay limited attention to aggregate shocks a conservative central banker with stronger preference for price stability eliminates the commitment problem thereby reduces output and price volatility and gives rise to a policy induced great moderation increased focus on price stability facilitates firms information processing and aligns their expectations better with policy decisions this coordination effect reduces aggregate real and nominal volatility consistent with empirical evidence the moderation manifests itself through reduced residual variance in vector autoregressions vars involving macroeconomic variables

booms and busts with dispersed information abstract dispersed information can generate booms and busts in economic activity boom bust dynamics appear when firms are initially over optimistic about demand due to a noisy private news consequently they overproduce which generates a boom and depresses their markups because the news is private firms cannot relate these low markups to aggregate optimism as low markups can also signal low demand this overturns their expectations generating a bust we emphasize a novel role for imperfect common knowledge dispersed information makes firms ignorant about their competitors actions which makes them confuse high noise driven supply with low fundamental demand

monetary policy for rationally inattentive economies with staggered price setting the paper examines the optimal monetary policy when firms are constrained by information processing capability and infrequent price adjustments firms information processing limit gives rise to imperfect knowledge about macroeconomic aggregates and endogenous information learning contingent on the monetary policy staggered price setting introduces the observed price duration and additional policy tradeoffs resulting from the interactions between nominal rigidities and imperfect information processing the integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks in the presence of markup shocks it is optimal for the central bank to focus on price stabilization in the initial periods following markup shocks and shifts the emphasis to output gap stabilization later moreover larger information capacity stronger complementarities and more persistent shocks require more aggressive price stabilization in the short run

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

learning over the business cycle policy implications abstract this paper studies the policy implications of the endogeneity of information about the state of the economy the business cycle can be made less noisy and more efficient by incentivizing firms to vary their pricing and production decisions more with their beliefs about the state of the economy this calls for countercyclical taxes complemented by a monetary policy that leans against the wind the optimal policies trade off allocative efficiency for informational efficiency

imperfect information multiple shocks and policy s signaling role abstract in multiple shock models when agents have imperfect information they attempt to infer a shock s type in addition to its size in this environment monetary policy plays an important signaling role this paper highlights this signaling role by showing that conclusions from imperfect information monetary models are sensitive to the number of shocks included with multiple shocks contractionary monetary policy can initially increase inflation and delay the eventual disinflation moreover multiple shocks can result in destabilizing price flexibility while optimal policy s response to one shock will depend on the existence of other shocks contrary to a typical linear quadratic framework

optimal monetary policy and transparency under informational frictions this paper examines the optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions the economy is subject to two types of shocks determining the efficient output level and firms desired markups to minimize the welfare reducing output gap and price dispersion between firms the central bank controls firms incentives and expectations by using a monetary instrument and disclosing information on the realized shocks this paper shows that an optimal policy comprises the disclosure of a linear combination of the two shocks and the adjustment of monetary instruments contingent on the disclosed information

a welfare based analysis of international monetary policy spillovers at the zero lower bound we study the welfare effects of international monetary policy spillovers at the zero lower bound focusing on the effects of forward guidance in a large economy foreign on its smaller trading partner home in scenarios motivated by the global financial crisis we find that foreign forward guidance has an overall prosper thy neighbor effect on the home economy as long as it increases foreign welfare this finding holds under alternative assumptions about exchange rate pass through or the degree of international financial integration however foreign forward guidance may worsen the trade off between the stabilization objectives of home monetary policy

decision making in the presence of heterogeneous information and social interactions the authors consider the solution of multivariate linear rational expectations models in the presence of heterogeneous information and social interactions to overcome the infinite regress in expectations problem that arises in the solution of these models we assume that agents expectations about the decisions and expectations of other agents are based solely on public information they show that the resulting solutions satisfy the key postulates of the rational expectations hypothesis but can nevertheless exhibit dynamic properties quite different from those under homogeneous information the authors illustrate this by analyzing a model of firms optimal factor demand decisions in this model the presence of information heterogeneity may accentuate the propagation effects of external shocks on firms factor demands copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a cautionary note on designing discrete choice experiments a comment on lusk and norwood s effect of experiment design on choice based conjoint valuation estimates recent monte carlo work on choosing experimental designs for discrete choice experiments seemed to greatly simplify this choice for applied researchers it suggested that a commonly used designs can generate unbiased estimates for indirect utility function specifications with main effects only and main effects plus higher order terms and b random designs are more efficient than main effects designs we show that these results are very specific to the particular indirect utility specifications studied and do not generalize well we further show that conclusions drawn concerning random designs are problematic and potentially dangerous for applied researchers

selection and monetary non neutrality in time dependent pricing models for a given frequency of price adjustment monetary non neutrality is smaller if older prices are disproportionately more likely to change selection for the age of prices provides a complete characterization of price setting frictions in time dependent models selection for older prices is weaker and non neutralities are larger if the hazard function of price adjustment is less strongly increasing selection is weaker if there is heterogeneity in price stickiness finally selection is weaker if durations of price spells are more variable in particular the taylor 1979 model exhibits maximal selection for older prices whereas the calvo 1983 model exhibits no selection

elastic attention risk sharing and international comovements in this paper we examine the effects of elastic information processing capacity or elastic attention proposed in sims 2010 on international consumption and income correlations in a tractable small open economy soe model with exogenous income processes we find that in the presence of capital mobility in financial markets elastic attention due to a fixed information processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty in addition we show that elastic attention can improve the model s predictions for the other key moments of the joint dynamics of consumption and income

long run consumption risk and asset allocation under recursive utility and rational inattention we study the portfolio decision of a household with limited information processing capacity rational inattention or ri in a setting with recursive utility we find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets even when the departure from standard expected utility with rational expectations is small in addition we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long run risk and thus require higher compensation in equilibrium our results are robust to the presence of correlation between the equity return and the ri induced noise and the presence of non tradable labor income

returns to contrarian investment strategies tests of naive expectations hypotheses abstract this paper examines the ability of naive investor expectations models to explain the higher returns to contrarian investment strategies contrary to lakonishok shleifer and vishny 1994 we find no systematic evidence that stock prices reflect naive extrapolation of past trends in earnings and sales growth building on bauman and dowen 1988 and la porta 1995 however we find that stock prices appear to naively reflect analysts biased forecasts of future earnings growth further we find that naive reliance on analysts forecasts of future earnings growth can explain over half of the higher returns to contrarian investment strategies

monetary policy obeying the taylor principle turns prices into strategic substitutes abstract monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level in normal times when monopolistic competitive firms increase their prices the central bank raises interest rates which lowers demand and creates an incentive for firms to reduce their prices thereby monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong we show that this condition holds when monetary policy follows the taylor principle by contrast if the equilibrium is indeterminate because monetary policy violates the taylor principle or in a liquidity trap where monetary policy is restricted by the zero lower bound pricing decisions are strategic complements we discuss the consequences for dynamic adjustment processes after shocks and some policy implications

the robustness of equilibria to incomplete information a number of papers have shown that a strict nash equilibrium action profile of a game may never be played if there is a small amount of incomplete information see for example carlsson and van damme 1993a we present a general approach to analyzing the robustness of equilibria to a small amount of incomplete information a nash equilibrium of a complete information game is said to be robust to incomplete information if every incomplete information game with payoffs almost always given by the complete information game has an equilibrium which generates behavior close to the nash equilibrium we show that many games with strict equilibria have no robust equilibrium and examine why we get such different results from existing refinements if a game has a unique correlated equilibrium it is robust a natural many player many action generalization of risk dominance is a sufficient condition for robustness

heterogeneous private sector information central bank disclosure and stabilization policy conventional wisdom has it that a central bank that uses an informational advantage to undertake active policy intervention can do as well at least so far as real outcomes are concerned by making its information publicly available and abstaining from stabilization this notion is examined using a framework incorporating heterogeneous private sector information concerning aggregate demand shocks an activist regime in which the central bank exploits its own information to engage in stabilization is found to be unambiguously superior to a noninterventionist regime where the central bank maintains a constant setting of policy but publicly discloses its own information

monetary policy for inattentive economies we offer a contribution to the analysis of optimal monetary policy we begin with a critical assessment of the existing literature arguing that most work is based on implausible models of inflation output dynamics we then suggest that this problem may be solved with some recent behavioral models which assume that price setters are slow to incorporate macroeconomic information into the prices they set a specific such model is developed and used to derive optimal policy in response to shocks to productivity and aggregate demand optimal policy is price level targeting base drift in the price level which is implicit in the inflation targeting regimes currently used in many central banks is not desirable in this model when shocks to desired markups are added optimal policy is flexible targeting of the price level that is the central bank should allow the price level to deviate from its target for a while in response to these supply shocks but it should eventually return the price level to its target path optimal policy can also be described as an elastic price standard the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate

an informational rationale for action over disclosure abstract the past two decades have seen a considerable increase in the amount of public information provided by policymakers are such disclosures desirable or is it instead preferable to use such information to condition a policy instrument such a tax or an interest rate this paper studies the relative merits of each means to use a policymaker s information in a flexible class of economies that feature dispersed information and payoff and learning externalities i provide conditions for when the exclusive use of a policy instrument or disclosure is optimal i then relate these to differences in the equilibrium and socially optimal use of information i conclude with a series of applications that show how my results apply to common beauty contest models competitive economies and a broad class of macroeconomic models among others

exogenous information endogenous information and optimal monetary policy most of the analysis of optimal monetary policy is conducted with the calvo model this paper studies optimal monetary policy when the slow adjustment of the price level is due to imperfect information by decision makers in firms we consider two models a model with exogenous dispersed information and a rational inattention model in the model with exogenous dispersed information complete stabilization of the price level is optimal after aggregate productivity shocks but not after markup shocks by contrast in the rational inattention model complete stabilization of the price level is optimal both after aggregate productivity shocks and after markup shocks moreover in the model with exogenous dispersed information there is no value from commitment to a future monetary policy by contrast in the rational inattention model there is value from commitment to a future monetary policy because then the private sector can trust the central bank that not paying attention to certain variables is optimal

signal extraction and rational inattention i introduction the objective of this paper is to compare two theories of information frictions in the first theory agents observe the state of the world with exogenously imposed noise we refer to this environment as the signal extraction se model 1 the second theory permits agents to design the distribution of noise terms by focusing limited attention on certain variables at the expense of others following sims 2003 we refer to this model as the rational inattention ri model 2 in both models agents respond to changes in the true underlying state slowly because it takes time for them to learn exactly what the new state is the key difference is that the noise distribution under ri is an outcome of optimal choice and thus can adapt to changing circumstances in the economy whereas under se the noise distribution is technologically fixed our goal is to explore this crucial distinction we explore the distinction between se and ri within a linear quadratic gaussian lqg setting we first study a univariate case for which the variance covariance matrix of the noise shocks can be solved in closed form first we note that at least within the lqg framework any variance covariance structure for the noise shocks derived from the ri problem can be exogenously imposed in the se environment so there is a sense in which the two environments are observationally equivalent the next result we find is that if the variance of the noise itself is fixed we can use a policy experiment to distinguish se from ri suppose that the variance of an exogenous shock is scaled up because of a change in policy in the se problem where the distribution of noise is exogenous an increase in the variance of the shock will lead to a different solution for the conditional variance and kalman gain consequently the change in policy will lead to a change in the model s dynamic behavior and the agent s payoffs in contrast in the ri problem if channel capacity is fixed a change in the variance of the exogenous shock will lead to the same change in the conditional variance of the state and the variance of the noise but will not affect the kalman gain that is inattentive agents with fixed capacity will behave as if they face noise shocks whose nature changes systematically as the dynamic properties of the economy change with policy furthermore we show that if we assume that the marginal cost of information is fixed capacity will be elastic with respect to a change in policy consequently the kalman gain in this case will also adjust in response to the policy change the losses of agents due to imperfect information depend on the value of the kalman gain therefore in general se and ri imply different policy recommendations in contrast we also find that in the univariate case if the ratio of the variance of the exogenous shock to that of the noise i e the signal to noise ratio snr is fixed the se and ri problems are observationally equivalent in the sense that they lead to the same dynamics of the model economy when the ratio of the conditional variance to that of the noise in the se problem equals a particular function of the channel capacity in the ri problem our results do not depend on the presence or absence of correlation between fundamental and noise shocks specifically in the presence of the correlation a change in the variance of the exogenous shock does not change the dynamic behavior of the model in the fixed capacity case whereas it changes the model s dynamics in the fixed information processing cost case in which both the variance of noise and the kalman gain are affected by the interactions between the correlation the variance of the fundamental shock and the conditional variance we then move on to study the multivariate case in this case given channel capacity the conditional variance covariance matrix can be obtained by solving a semidefinite programming problem in which the inattentive agent minimizes the expected loss due to information processing constraints

bayesian conjoint choice designs for measuring willingness to pay in this paper we propose a new criterion for selecting efficient conjoint choice designs when the interest is in quantifying willingness to pay wtp the new criterion which we call the wtp optimality criterion is based on the c optimality criterion which is often used in the optimal experimental design literature we use a simulation study to evaluate the designs generated using the wtp optimality criterion and discuss the design of a real life conjoint experiment from the literature the results show that the new criterion leads to designs that yield more precise estimates of the wtp than bayesian d optimal conjoint choice designs which are increasingly being seen as the state of the art designs for conjoint choice studies and to a substantial reduction in the occurrence of unrealistically high wtp estimates

limited information capacity as a source of inertia abstract we derive optimal time dependent adjustment rules from shannon s 1948 information theory in a continuous time lq prediction problem with a costly rate of information acquisition processing the optimal prediction evolves smoothly but jumps at an optimally chosen frequency when fresh information accrues a more volatile and persistent target raises the information rate required to maintain a sampling frequency this cost effect moderates and may even reverse the benefit effect on the value of information so optimal inertia is unresponsive to and nonmonotonic in the predictability of the environment conventional models with a fixed cost per observation imply no such cost effect so inertia rises quickly in the predictability of the environment

indicator variables for optimal policy under asymmetric information the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment the private sector is assumed to have more information about the state of the economy than the policymaker certainty equivalence holds for the optimal reaction function in state space form t he coefficients are independent of the degree of uncertainty about the state of the economy however in the case of commitment certainty equivalence does not hold for the reaction function in integrative form the policy instrument cannot be written as a distributed lag of past estimates of past states of the economy instead optimal policy will generally depend on new estimates of past states of the economy and in ways that depend on the information structure furthermore the usual separation principle does not hold since the estimation of the state of the economy is not independent of optimization and is in general quite complex we present a general characterization of optimal filtering and control in settings of this kind and discuss an application of our methods to the problem of the optimal use of real time macroeconomic data in the conduct of monetary policy

observing and shaping the market the dilemma of central banks while the central bank observes the market activity to assess economic fundamentals it shapes the market outcome through its policy interventions the more the central bank influences the market the more it spoils the informational content of economic aggregates how should the central bank act and communicate when it derives its information from observing the market this paper analyses the optimal central bank s action and disclosure under endogenous central bank s information for three operational frameworks pure communication action and communication and signaling action when the central bank takes an action it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes however in the realistic case where central bank s action is observable it may be optimal to refrain from implementing any action

long term global market correlations the correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration we decompose diversification benefits into two parts one component due to variation in the average correlation across markets and a another component due to the variation in the investment opportunity set from this we infer that periods of globalization have both benefits and drawbacks for international investors globalization expands the opportunity set but as a result the benefits from diversification rely increasingly on investment in emerging markets

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

have the tax benefits of debt been overestimated abstract we re examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields we show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions we develop improved estimates of marginal tax rates using a non parametric procedure that produces more accurate estimates of the distribution of future taxable income we show that additional debt would provide firms with much smaller tax benefits than previously thought and when expected distress costs and difficult to measure non debt tax shields are also considered it appears plausible that most firms have tax efficient capital structures

information acquisition and welfare we study information acquisition in a flexible framework with strategic complementarity or substitutability in actions and a rich set of externalities that are responsible for possible wedges between the equilibrium and the efficient acquisition of information first we relate the in efficiency in the acquisition of information to the in efficiency in the use of information and explain why efficiency in the use is no guarantee of efficiency in the acquisition next we show how the acquisition of private information affects the social value of public information i e the comparative statics of equilibrium welfare with respect to the quality of public information finally we illustrate the implications of the results in a monetary economy with price rigidities and dispersed information about productivity shocks

the welfare costs of expected and unexpected inflation the monetary search model by lagos and wright 2005 is extended with imperfect information about nominal shocks as in lucas 1972 an analytical solution exists with logarithmic preferences in general individuals hold precautionary balances calibrated to united states postwar data the welfare cost of the monetary cycle is calculated to be small below 0 0003 of gdp compared to the welfare cost of the inflation tax around 0 25 of gdp the main reason for the minute welfare cost of the monetary cycle is its low amplitude in 1947 2007 but monetary crashes such as those experienced during the great depression can generate important welfare costs

robustly strategic consumption portfolio rules with informational frictions this paper provides a tractable continuous time constant absolute risk aversion gaussian framework to explore how the interactions of fundamental uncertainty model uncertainty due to a preference for robustness and state uncertainty due to information processing constraints rational inattention affect strategic consumption portfolio rules and precautionary savings in the presence of uninsurable labor income specifically after solving the model explicitly i compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion robustness and inattention furthermore for plausibly estimated and calibrated model parameters i quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels this paper was accepted by neng wang finance

endogenous persistence in an estimated dsge model under imperfect information a framework for estimating dynamic stochastic general equilibrium dsge models by bayesian methods and validation under very general information assumptions is applied to a new keynesian model the standard asssumption that private agents have perfect information observing all state variables including shocks whereas the econometrician uses only observable data is compared with both agents having the same imperfect information ii set we also generalise rational expectations to a behavioural composite model that allows some households and firms to form expectations adaptively we find significant empirical support for ii as an endogenous persistence mechanism but this is dominated by that from habit and adaptive learning

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

monetary policy endogenous inattention and the volatility trade off this paper addresses the output price volatility puzzle by studying the interaction of optimal monetary policy and agents beliefs we assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs endogenous inattention is a nash equilibrium in the information processing rate although a decline of policy activism directly increases output volatility it indirectly anchors expectations which decreases output volatility if the indirect effect dominates then the usual trade off between output and price volatility breaks down this provides a potential explanation for the great moderation that began in the 1980 s

the signaling role of policy actions abstract in an economy affected by shocks that are imperfectly known the monetary instrument takes on a dual stabilizing role as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank s assessment to firms because mark up shocks cannot be neutralized by monetary policy providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion recognizing the signaling role of its instrument the central bank distorts its policy response in order to optimally shape firms beliefs while providing firms with more information is always detrimental to the output gap it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel although more transparency is always detrimental to welfare the information that is conveyed by the monetary instrument improves welfare when firms coordination is highly valuable

effect of experimental design on choice based conjoint valuation estimates in this article we investigate the effect of several commonly used experimental designs on willingness to pay in a monte carlo environment where true utility parameters are known all experimental designs considered in this study generated unbiased valuation estimates however random designs or designs that explicitly incorporated attribute interactions generated more precise valuation estimates than main effects only designs a key result of our analysis is that a large sample size can substitute for a poor experimental design overall our results indicate that certain steps can be taken to achieve a manageably sized experimental design without sacrificing the credibility of welfare estimates

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

imperfect common knowledge staggered price setting and the effects of monetary policy this paper studies the consequences of a lack of common knowledge in the transmission of monetary policy by integrating the woodford 2003a imperfect common knowledge model with taylor calvo staggered price setting models the average price set by monopolistically competitive firms depends on their higher order expectations about not only the current state of the economy but also about the states in the future periods in which prices are to be fixed this integrated model provides a plausible explanation for the observed effects of monetary policy it shows analytically how price adjustments are delayed and how the response of output to monetary disturbances is amplified

dynamic pricing and imperfect common knowledge abstract introducing private information into the dynamic pricing decision of firms by adding an idiosyncratic component to marginal cost can help explain two stylised facts about price changes aggregate inflation responds gradually and with inertia to shocks at the same time as individual price changes can be large the inertial behaviour of inflation is driven by privately informed firms strategically herding on the public information contained in the observations of lagged aggregate variables the model also matches the average duration between price changes found in the data and it nests the standard new keynesian phillips curve as a special case to solve the model the paper derives an algorithm for solving a class of dynamic models with higher order expectations

robust control informational frictions and international consumption correlations abstract in this paper we examine the effects of model misspecification robustness or rb on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation we show that in the presence of capital mobility in financial markets rb lowers the international consumption correlations by generating heterogeneous responses of consumption to productivity shocks across countries facing different macroeconomic uncertainty in addition we show that rb can also improve the model s predictions in three other moments of consumption dynamics the relative volatility of consumption to income the persistence of consumption and the correlation between consumption and output after calibrating the rb parameter using the detection error probabilities we show that the model can explain the observed international consumption correlations as well as the other consumption moments quantitatively finally we show that the main conclusions of our benchmark model do not change in an extension in which the agent cannot observe the state perfectly due to finite information processing capacity

optimal monetary policy when information is market generated endogenous i e market generated signals observed by firms have crucial implications for monetary policy when information is endogenous firms gather a demand signal from their market that is both real and nominal as a result the traditional surprise channel of monetary policy is absent instead monetary policy works through a signaling channel as it affects firms information through the demand signal the optimal policy is then the signaling policy i e the policy that maximizes the information content of the demand signal in our setup the signaling policy targets a positive correlation between money supply and prices which emphasizes the natural response of prices to real shocks on the contrary in the more traditional case of exogenous information optimal monetary policy would stabilize prices as it acts through the surprise channel we show that the signaling policy is optimal regardless of the amount of attention that firms pay to central bank communication

how equilibrium prices reveal information in a time series model with disparately informed competitive traders abstract accommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher order expectations that is rational investors are forced into a situation where they must forecast the forecasts of other agents in a dynamic setting this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity by using the frequency domain approach of whiteman linear rational expectations models a user s guide university of minnesota press minneapolis 1983 and kasa forecasting the forecasts of others in the frequency domain rev econ dynam 3 2000 726 756 this paper demonstrates how information structures previously believed to preserve asymmetric information in equilibrium converge to a symmetric information rational expectations equilibrium the revealing aspect of the price process lies in the invertibility of the observed state space which makes it possible for agents to infer the economically fundamental shocks and thus eliminating the need to forecast the forecasts of others

elasticity of attention and optimal monetary policy abstract optimal monetary policy depends on whether agents have exogenous endogenous inelastic or endogenous elastic attention under elastic attention optimal monetary policy induces equilibria that are not possible under the other two settings no attention to any shocks that generate inefficient economic fluctuations

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

expectations management and stock returns we establish a link between firms managing investors performance expectations earnings announcement premiums and cyclical patterns i e seasonalities in returns firms that are more likely to manage expectations toward beatable levels predictably earn lower returns before and higher returns during their earnings announcements this pattern repeats across firms fiscal quarters suggesting firms manufacture positive surprises by negatively biasing investors expectations ahead of announcing earnings we corroborate these findings using non price based outcomes indicative of expectations management together our findings are consistent with the pressure for firms to meet earnings targets shaping the cross section of firms stock returns

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

optimal monetary policy with uncertain fundamentals and dispersed information this paper studies optimal monetary policy in a model where aggregate fluctuations are driven by the private sector s uncertainty about the economy s fundamentals information on aggregate productivity is dispersed across agents and there are two aggregate shocks a standard productivity shock and a noise shock affecting public beliefs about aggregate productivity neither the central bank nor individual agents can distinguish the two shocks when they are realized despite the lack of superior information monetary policy can affect the economy s relative response to the two shocks as time passes better information on past fundamentals becomes available the central bank can then adopt a backward looking policy rule based on more precise information about past shocks by announcing its response to future information the central bank can influence the expected real interest rate faced by forward looking consumers with different beliefs and thus affect the equilibrium allocation if the announced future response is sufficiently aggressive the central bank can completely eliminate the effect of noise shocks however this policy is typically suboptimal as it leads to an excessively compressed distribution of relative prices the optimal monetary policy balances the benefits of aggregate stabilization with the costs in terms of cross sectional efficiency copyright wiley blackwell

characterizing social value of information abstract this paper characterizes the social value of information in bayesian games with symmetric quadratic payoff functions and normally distributed public and private signals the main result provides a necessary and sufficient condition for welfare to increase with public or private information in so doing we represent welfare as a linear combination of the variance of a common term in an equilibrium strategy and that of an idiosyncratic term which are referred to as the common variance and the idiosyncratic variance of actions respectively the ratio of their coefficients is a key parameter in our condition if the coefficient of the common variance is relatively large welfare necessarily increases but if it is relatively small welfare can decrease using our condition we find eight types of games with different welfare effects of information

overconfidence subjective perception and pricing behavior abstract we study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information our price setters overestimate their abilities to infer aggregate shocks from private signals the fraction of uninformed firms is endogenous firms can obtain information by paying a fixed cost we find two results i overconfident firms are less inclined to acquire information relative to the rational benchmark ii prices might exhibit excess volatility driven by non fundamental noise we explore the empirical predictions of our model for idiosyncratic price volatility