Title: Essays on Information, Expectations, and the Aggregate Economy
Description: This dissertation contains three essays on Macroeconomics about the importance of information and expectations in the aggregate economy. The first chapter studies empirically and theoretically how the interest rate set by the central bank affect the economy through the effects that the announcement of the decisions has on people's forecasts of economic conditions. Using Brazilian Survey data that reports daily statistics, this chapter studies how forecasts of inflation and output growth respond to unexpected policy rate decisions. The results show that inflation forecasts increase in the short run after an unexpected increase in the policy rate and show a mild decrease 1 year after the meeting. Output forecasts, when measured by industrial production growth also increase in the short run, but less strongly than inflation. When measured by the growth in gross domestic product, show no response. The theoretical section develops a New Keynesian model with a signaling role of the interest rate.

The empirical results can be explained when firms possess less information than the central bank at the time they see the interest rate and they interpret "enough" of the surprise in the rate as information about the current natural rate of interest. The second chapter studies if standard theory supports the "Neo-Fisherian" proposition, in which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables.

Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such "forward guidance" are likely, in the case of a long-horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply. The final chapter introduces asymmetric information in a simple stochastic general equilibrium model with endogenous default.

It shows that when foreign lenders price sovereign assets with less information than the government, the volatility of spreads increases substantially. This increase in volatility is mainly due to an increase in debt and a strong increase in spreads when output of the country is relatively low and foreign lenders believe that it is higher. In other scenarios, the behavior of spreads is similar to the symmetric information case. For an empirically plausible level of noise, the model implies a better fit to data in spread-related statistics without harming the fit on other areas. It is also shown that when the noise of the signal increases, there is a non-monotonic relation between the noise and business cycle statistics.