DP14577 Learning over the Business Cycle: Policy Implications

Author(s): George-Marios Angeletos, Luigi Iovino, Jennifer La'O
Publication Date: April 2020
Programme Areas: Public Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14577

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.