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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Do Noisy Data Exacerbate Cyclical Volatility?
Antulio N. Bomfim

Abstract: How does the additional uncertainty associated with noisy economic data affect business cycle fluctuations? I use a simple variant of the neoclassical growth model to show that the answer depends crucially on the assumed expectation-formation capabilities of agents. Under efficient signal extracting, noisy economic indicators dampen cyclical volatility. The opposite occurs when agents follow a simple bounded rational strategy.

Keywords: Volatility, measurement error, signal extraction, expectations, bounded rationality

Full paper (171 KB PDF)

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Last update: October 20, 1999