The Macroeconomic Effects of Infrequent Information with Adjustment Costs

Marco Bonomo () and René Garcia ()

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: In the last decade, the potential macroeconomic effects of intermittent large adjustments in microeconomic decision variables such as prices, investment, consumption of durables or employment – a behavior which may be justified by the presence of kinked adjustment costs – have been studied in models where economic agents continuously observe the optimal level of their decision variable. In this paper, we develop a simple model which introduces infrequent information in a kinked adjustment cost model by assuming that agents do not observe continuously the frictionless optimal level of the control variable. Periodic releases of macroeconomic statistics or dividend announcements are examples of such infrequent information arrivals. We first solve for the optimal individual decision rule, that is found to be both state and time dependent. We then develop an aggregation framework to study the macroeconomic implications of such optimal individual decision rules. Our model has the distinct characteristic that a vast number of agents tend to act together, and more so when uncertainty is large. The average effect of an aggregate shock is inversely related to its size and to aggregate uncertainty. We show that these results differ substantially from the ones obtained with full information adjustment cost models.

Keywords: macroeconomic effects of infrequent information; adjustment costs; state dendent and time dendent rules (search for similar items in EconPapers)
JEL-codes: D80 (search for similar items in EconPapers)
Date: 1997
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Related works:
Working Paper: The Macroeconomic Effects of Infrequent Information With Adjustment Costs (2000)
Working Paper: The Macroeconomic Effects of Infrequent Information With Adjustment Costs (1997)
Journal Article: The macroeconomic effects of infrequent information with adjustment costs (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:mtl:montde:9716

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