Noisy Business Cycles!

Abstract

This paper investigates an RBC economy that features dispersed information about the underlying aggregate productivity shocks and, potentially, shocks to tastes or monopoly power. We show how the heterogeneity of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of short-run fluctuations; (iv) imply that the bulk of such fluctuations are driven by noise; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed labor wedges and Solow residuals. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of general-equilibrium linkages. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions, no stabilization policy can improve upon the equilibrium allocations.