Macroeconomic consequences of optimal information acquisition

• Main Author: Corrick, Ian
• Published: University of York 2013
• Subjects: 330
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.605326

This thesis considers the extension of the ‘sticky information’ concept of Mankiw and Reis (2002), by which agents form expectations rationally conditional on out-of-date information, with new information arriving probabilistically, to models where the probability of receiving new information is a choice variable. Previously this has been done only for simple, restricted economic models (e.g. Branch et al. (2009)), but not for DSGE models as used in modern macroeconomic theory. Numerical results for two different models are presented and then estimation of the more fully-featured model is conducted. It is found that for a simple model of monopolistically competitive firms the introduction of endogenous sticky information can lead to multiple equilibria, particularly when there is strong strategic complementarity. The optimal updating probabilities are strongly responsive to the variability of monetary policy shocks and it is shown that the macroeconomic effect of this is that changes in shock variability cause a trade-off between the variance of output and inflation, which doesn't occur in the case of exogenous sticky information. For a DSGE model with endogenous sticky information with more than one type of agent, with agent types having separate updating probabilities, it is found that the possibility of multiple equilibria is reduced relative to the simple model. The numerical results for this model show that the effects of changes in the coefficients of monetary policy on the volatility of variables and on the model dynamics, as characterized by the impulse response functions, may be amplified by the presence of endogenous sticky information. Finally, the estimation results show there has been a reduction in the updating probability of firms, and an increase in that of households, in the period 1984Q3 - 2006Q1 compared to 1955Q1 - 1984Q2. This can be explained by a switch of monetary policy responsiveness from the output gap to inflation and by changes in the volatilities of the exogenous shocks themselves.