Imperfect Information and the Business Cycle

37 Pages Posted: 20 Jan 2010

See all articles by Fabrice Collard

Fabrice Collard

Universite de Toulouse I - CNRS (GREMAQ and IDEI)

Harris Dellas

University of Bern - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: January 2010

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.

Keywords: Bayesian estimation, imperfect information, New Keynesian model, signal extraction

JEL Classification: E32, E52

Suggested Citation

Collard, Fabrice and Dellas, Harris and Smets, Frank, Imperfect Information and the Business Cycle (January 2010). CEPR Discussion Paper No. DP7643, Available at SSRN: https://ssrn.com/abstract=1539315

Fabrice Collard

Universite de Toulouse I - CNRS (GREMAQ and IDEI) ( email )

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Harris Dellas

University of Bern - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Frank Smets

European Central Bank (ECB) ( email )

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KU Leuven - Center for Economic Studies ( email )

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