Do Misperceptions about Demand Matter? Theory and Evidence

Kenza Benhima and Céline Poilly ()

No 1717, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: We assess theoretically and empirically the consequences of demand misperceptions. In a New Keynesian model with dispersed information, agents receive noisy signals about both supply and demand. Firms and consumers have an asymmetric access to information, so aggregate misperceptions of demand by the supply side can drive economic fluctuations. The model’s predictions are used to identify empirically fundamental and noise shocks on supply and demand. We exploit survey nowcast errors on both GDP growth and inflation, fundamental and noise shocks affecting the errors with opposite signs. We show that demand-related noise shocks have a negative effect on output and contribute substantially to business cycles. Additionally, monetary policy plays a key role in the transmission of demand noise.

Keywords: Business cycles; information frictions; noise shocks; SVARs with sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 D82 E31 E32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2017-05
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Do Misperceptions about Demand Matter? Theory and Evidence (2017)
Working Paper: Do Misperceptions about Demand Matter? Theory and Evidence (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1717

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