Discussion Paper

No. 2012-46 | September 12, 2012
Information Stickiness in General Equilibrium and Endogenous Cycles

Abstract

Traditionally, observed fluctuations in aggregate economic time series have been mainly modelled as being the result of exogenous disturbances. A better understanding of macroeconomic phenomena, however, surely requires looking directly at the relations between variables that may trigger endogenous nonlinearities. Several attempts to justify endogenous business cycles have appeared in the literature in the last few years, involving many types of different settings. This paper intends to contribute to such literature by investigating how we can modify the well-known information stickiness macro model, through the introduction of a couple of reasonable new assumptions, in order to trigger the emergence of endogenous fluctuations.

JEL Classification

E10 C62 E32 C61

Cite As

Orlando Gomes (2012). Information Stickiness in General Equilibrium and Endogenous Cycles. Economics Discussion Papers, No 2012-46, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2012-46

Assessment



Comments and Questions


Anonymous - Model and analysis
September 13, 2012 - 10:55

The idea of introducing these two assumptions and the effect of stickyness is good as is the treatment.

Unfortunately the "benchmark model" is an over-simplification of what is possible to model in this way. An almost complete macroeconomics system (no foreign trade being included) it has at least ...[more]

... 6 entities or role-playing agents. Such a model was given by this writer in Google Images: DiagFuncMacroSyst.pdf which is attached here. With such a model the effect of stickyness would be very different, so it is not possible to apply what has been found here directly to a closer-to-actual system. Never-the-less the author should be applauded for making a step in the right direction.


Orlando Gomes - Reply
September 13, 2012 - 16:24

Thank you for your comment. The main challenge that every scientist faces is, in fact, to achieve the best possible balance between comprehensiveness and tractability. Although the first one is always desirable, it frequently collides with the necessity of achieving a solid and profound understanding of some particular features of ...[more]

... reality. Sticky-information models, pioneered by Gregory Mankiw and Ricardo Reis, intended to deal with a specific issue: the role of information as a source of macroeconomic stickiness. If economic agents update their set of relevant information infrequently in time, this implies that there will be inertia in the economic system, i.e., real and nominal aggregates will respond sluggishly to shocks (e.g., monetary policy shocks). This is an important insight that helps on understanding the nature of business cycles, although we all recognize that it cannot explain everything. The model can be extended in many directions, and in fact it has been, with a series of contributions in the last few years. The concern in this paper is to add a new contribution that is also a specific one: to relax the assumptions on rational expectations and information updating of the original analysis, in order to stress that fluctuations are not necessarily the result of exogenous shocks; they can arise endogenously, given the nature of the behavior of the economic agents.


Alexandra Ferreira-Lopes - A suggestion
October 14, 2012 - 13:28

I think this paper is very interesting.
I just have one suggestion - I think section 6 should have more intuition regarding the presented results. additionally, policy implications, that are presented in the conclusion, should be deeply discussed in this section and also in section 5.


Orlando Gomes - Reply
October 17, 2012 - 17:43

Alexandra, thank you for your comment. I have tried to keep the presentation of results as simple and straightforward as possible. The strong idea is that the extent in which agents' behavior departs from perfect foresight and full attentiveness will determine the effectiveness of monetary policy. If such departures are ...[more]

... too large, the model shows that monetary policy needs to be strongly aggressive in order to avoid endogenous uncertainty. Thus, the framework provides a relevant and intuitive result: the aggressiveness of monetary policy is directly and positively correlated with inattentiveness and with departures from rational expectations. Although these results are stated in the conclusion, I agree that they can be further emphasized in section 6.


Anonymous - Invited Reader Comment
October 25, 2012 - 13:08

See attached file


Orlando Gomes - Reply to the comment
November 01, 2012 - 11:32

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Anonymous - Referee Report 1
October 31, 2012 - 12:13

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Orlando Gomes - Reply to the referee report
November 01, 2012 - 11:33

See attached file.


Anonymous - Referee Report 2
November 01, 2012 - 09:06

See attached file


Orlando Gomes - Reply to referee report #2
November 01, 2012 - 16:07

See attached file.