Keywords: Cyclical volatility, signal extraction bounded rationality, production externalities
Abstract: I analyze the business cycle implications of noisy economic
indicators in the context of a dynamic general equilibrium model.
Two main results emerge. First, measurement error in preliminary
data releases can have a quantitatively important effect on economic
fluctuations. For instance, under efficient signal-extraction, the
introduction of accurate economic indicators would make aggregate
output 10 to 30 percent more volatile than suggested by the
post-war experience of the U.S. economy. Second, the sign---but not
the magnitude---of the measurement error effect depends crucially on
the signal processing capabilities of agents. In particular, if
agents take the noisy data at face value, significant improvements
in the quality of key economic indicators would lead to considerably
less cyclical volatility.
Full paper (267 KB PDF)
| Full paper (235 KB Postscript)
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Last update: December 21, 1999