When Is Sticky Information More Information?

Pierre Daniel Sarte

Journal of Money, Credit and Banking, 2014, vol. 46, issue 7, 1345-1379

Abstract: This paper uses sectoral data to study survey‐based balance 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 notable information lags, on the order of 71/2 months on average. Moreover, information stickiness implies that noisy output fluctuations will be attenuated in survey answers and, consequently, helps explain why balance indices successfully track business cycles. Conversely, in an environment populated by fully informed identical firms, as in the standard RBC framework, for example, balance indices instead become degenerate. Finally, information regarding changes in aggregate output tends to be sectorally concentrated. The paper, therefore, illustrates how this feature of the data may be relevant for the construction of balance indices.

Date: 2014
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https://doi.org/10.1111/jmcb.12143

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:7:p:1345-1379

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