TY - JOUR AU - Angeletos,George-Marios AU - La'O,Jennifer TI - Noisy Business Cycles JF - National Bureau of Economic Research Working Paper Series VL - No. 14982 PY - 2009 Y2 - May 2009 UR - http://www.nber.org/papers/w14982 L1 - http://www.nber.org/papers/w14982.pdf N1 - Author contact info: George-Marios Angeletos Department of Economics MIT E52-251 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/452-3859 Fax: 617/253-1330 E-Mail: angelet@mit.edu Jennifer La'O Booth School of Business Department of Economics University of Chicago 5807 South Woodlawn Avenue Chicago, IL 60637-1610 Tel: 773-702-9768 E-Mail: Jennifer.La'O@chicagobooth.edu M1 - published as George-Marios Angeletos, Jennifer La'O. "Noisy Business Cycles," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2009, Volume 24" University of Chicago Press (2010) AB - This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and, potentially, shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations. ER -