Consumer misperceptions, uncertain fundamentals, and the business cycle

Patrick Hürtgen

Journal of Economic Dynamics and Control, 2014, vol. 40, issue C, 279-292

Abstract: This paper estimates the importance of shocks to consumer misperceptions “noise shocks” for U.S. business cycle fluctuations. I embed imperfect information as in Lorenzoni (2009) into a Smets and Wouters (2007)-type DSGE model. Agents only observe aggregate productivity and a signal about the permanent component contaminated with noise. Based on this information agents form beliefs about the temporary and the permanent component of productivity. Shocks to the signal (noise shocks) trigger aggregate fluctuations unrelated to changes in productivity. Bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations. Nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks. These features help to resolve conflicting results in the previous literature.

Keywords: Imperfect information; Noise shocks; Aggregate fluctuations; Bayesian estimation; Bayesian model comparison (search for similar items in EconPapers)
JEL-codes: D83 E32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Consumer Misperceptions, Uncertain Fundamentals, and the Business Cycle (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:40:y:2014:i:c:p:279-292

DOI: 10.1016/j.jedc.2014.01.008

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