Keywords: Volatility, measurement error, signal extraction, expectations, bounded rationality
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.
Full paper (171 KB PDF)
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Last update: October 20, 1999