Finance and Economics Discussion Series (FEDS)
October 1999
Do Noisy Data Exacerbate Cyclical Volatility?
Antulio N. Bomfim
Abstract:
How does the additional uncertainty associated with noisy economic data affect business cycle fluctuations? I use a simple variant of the neoclassical growth model to show that the answer depends crucially on the assumed expectation-formation capabilities of agents. Under efficient signal extracting, noisy economic indicators dampen cyclical volatility. The opposite occurs when agents follow a simple bounded rational strategy.
Keywords: Volatility, measurement error, signal extraction, expectations, bounded rationality
PDF: Full Paper
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