NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement

Laura Veldkamp, Justin Wolfers

NBER Working Paper No. 12557
Issued in October 2006
NBER Program(s):   AP   EFG   ME

Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous work examined production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost of production and a low marginal cost of replication, sectors can share the cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated productions choices. By filtering out sector-specific shocks and transmitting aggregate ones, information markets amplify business-cycle comovement.

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A data appendix is available at http://www.nber.org/data-appendix/w12557

This paper was revised on February 2, 2007

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Document Object Identifier (DOI): 10.3386/w12557

Published: Veldkamp, Laura & Wolfers, Justin, 2007. "Aggregate shocks or aggregate information? Costly information and business cycle comovement," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 37-55, September. citation courtesy of

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