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Imperfect information and macroeconomics

University of British Columbia

This dissertation addresses the role that imperfect information about economic fundamentals plays in shaping the equilibrium outcomes of the economy. The three chapters each look at different issues. The first chapter examines the optimal amount of "noise" that a policy authority should inject into its public announcements. Private sector agents may individually incur a cost of acquiring private information about the state of the economy and this private information may be incorporated into their actions. The policy authority attempts to infer the state of the economy from a noisy measure of aggregate private sector actions and makes a public announcement to inform the private sector of this inference. The policy authority faces a trade-off between informing the private sector of the state of the economy, and gathering information about the state of the economy. It is shown that there may exist conditions under which a policy authority can increase the welfare of the agents in the economy by making policy statements that do not perfectly reveal the policy authority’s information. The second chapter examines the ability of equilibrium job search and matching models to produce highly volatile unemployment rates when subjected to small fluctuations in labour productivity. A model is presented in which there is asymmetric information between firms and workers concerning their output as well as the ability for workers to search on-the-job for new jobs. This model is able to amplify the effects of labour productivity well beyond that observed in the standard equilibrium job search models. The third chapter examines the ability of standard monetary business cycle models to yield immediate increases in aggregate consumption and investment in response to the arrival of news concerning future increases in productivity. Such responses are not possible in the standard real business cycle models. It is found that the combination of nominal price and wage rigidities and interest rate rules that target expected inflation can result in immediate increases in consumption and investment upon the arrival of news indicating future productivity increases.

Text

2010-01-16

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http://hdl.handle.net/2429/18419

Economics

University of British Columbia

UBCV

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