Learning about informational rigidities from sectoral data and diffusion indices

Pierre Daniel Sarte

No 10-09, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper uses sectoral data to study survey-based diffusion indices designed to capture changes in the business cycle in real time. The empirical framework recognizes that when answering survey questions regarding their firm's output, respondents potentially rely on infrequently updated information. The analysis then suggests that their answers reflect considerable information lags, on the order of 16 months on average. Moreover, because information stickiness leads respondents to filter out noisy output fluctuations when answering surveys, it helps explain why diffusion indices successfully track business cycles and their consequent widespread use. Conversely, the analysis shows that in a world populated by fully informed identical firms, as in the standard RBC framework for example, diffusion indices would instead be degenerate. Finally, the data suggest that information regarding changes in aggregate output tends to be sectorally concentrated. The paper, therefore, is able to offer basic guidelines for the design of surveys used to construct diffusion indices.

Date: 2010
New Economics Papers: this item is included in nep-bec and nep-cba
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