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Discussion Paper Details

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Title: Imperfect information and the business cycle

Author(s): Fabrice Collard, Harris Dellas and Frank Smets

Publication Date: January 2010

Keyword(s): Bayesian estimation, imperfect information, New Keynesian model and signal extraction

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Collard, F, Dellas, H and Smets, F. 2010. 'Imperfect information and the business cycle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7643