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Do Misperceptions about Demand Matter? Theory and Evidence

Kenza Benhima () and Céline Poilly ()

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

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 aff ecting the errors with opposite signs. We show that demand-related noise shocks have a negative eff ect 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: E32 D82 C32 E31 (search for similar items in EconPapers)
Pages: 52 pp.
Date: 2017-05
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: Do Misperceptions about Demand Matter? Theory and Evidence (2017) Downloads
Working Paper: Do Misperceptions about Demand Matter? Theory and Evidence (2017) Downloads
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