Cycle, Gaps, and the Social value of
Information
George-Marios Angeletos, Luigi Laino and
Jennifer La’o
July 9, 2014
What are the welfare effects of the
information contained in macroeconomic statistics, central-back communication,
or news in the media? We address this question in a business-cycle framework
that nests the neoclassical core of modern DSGE models. Earlier lessons that
were based on “beauty contests” (Moris and Shin,2002) are found to be inapplicable.
Instead, the social value of information is shown to hinge on essentially the
same conditions as the optimality of output stabilization policies. More
precise information is unambiguously welfare-improving as long as the business
cycle is driven primarily by technology and preference shocks-but can be detrimental
when shocks to markups and wedges cause sufficient volatility in “output gaps”.
A numerical exploration suggests that the first scenario is more plausible.
Market participants pay close attention to
public signals regarding the state of the economy, like those embodied in
central-back communications, macroeconomic statistics, surveys of consumer
confidence, or news in the media. Given how noisy these signals can be, the
market’s heightened response to them
Often feels “excessive”. In an influential
AER article, Moris and Shin (2002) have argued that this is due to the
sunspot-like role that public news play in environments with dispersed
information: by helping agents coordinates their choices, noisy public signals
can have a destabilizing effect on the economy, contributing to higher
volatility and lower welfare.
The welfare effect of information within
the context of business cycle.
Withholding the release of the macroeconomic
statistics, practicing “constructive ambiguity”, or otherwise constructing the
information that is available to the public makes sense when, and only when, a
sufficiently high fraction of the business cycle is driven primarily by shocks
that move the “output gap”. For a plausible parameterization of our framework,
this was not the case: more information was found to be welfare-incoming.
Based on the flexible-price allocations of
an elementary DSGE model.
The economy is hit only by technology
shocks, but, contrary to what would have been optical, monetary policy fails to
replicate flexible-price allocations. In this case, the suboptimal response of
monetary policy to the underlying shocks introduces random variation in
realized markups and output gaps. This opens the possibility that more precise
information about the underlying productivity shocks may now be detrimental. In
short, a suboptimal monetary policy might induce an otherwise innocuous
productivity shock to have the same welfare implication as a distortionary
markup shock.
By focusing on flexible-price allocations,
we have deliberately abstracted from such confounding effects. By contrast the suboptimality
of monetary policy is playing a central role in the otherwise complementary
work of Helling(2005) and Roca(2010). These papers assume sticky prices and study
the welfare effects of information regarding exogenous shocks to the quantity
of money. Clearly, monetary shocks that are unknown at the time firms set their
prices cause equilibrium output to fluctuate away from the first best. To the
extent that monetary policy fails to instate the economy from such shocks, were
precise public information can simply help the market do what monetary policy
should have done in the first place: once these shocks become known at the time
firm set their prices, prices adjust one-to-one to these shocks, guaranteeing
that the shocks have no effect on real allocations and welfare. These
observation help explain the results of the aforementioned two papers and the difference
between their contribution and ours.
Preference and technology shocks can trigger
inefficient fluctuations to the extent that market frictions impact the response
of flexible-price allocations to the aforementioned shocks.
The welfare effects of information to hinge
on how strongly the wedges covary with the technology shocks and thereby on the
severity of the market frictions.
Another interesting issue emerges if the
available information interferes with the ability of a policy makes to stabilize
the economy. James and Lawler (2011) make a related point within the content of
the Morris-Shim “beauty contest”. Translating this insight in the content of
business cycle hinges, once again, on the nature of the underlying shocks and
the resulting “output gaps”.
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