Tuesday, 6 October 2009

Noisy business cycles

If you read the Krugman piece in the NYTimes, and think that macro has becoming a field of warring tribes with nothing to say to each other... you may be more right than I would like, but it doesn't mean that there is no way to heal the breach. At the CREi seminar this Monday, Marios Angeletos gave a talk on Noisy Business Cycles (forthcoming in the NBER macro annual). The paper marries many elements of real business cycles (RBC) models with noise about the state of the aggregate economy. Because agents do not know how the economy is doing overall, even very small technology shocks can translate into large aggregate fluctuations. The result is an economy that has a strong RBC flavor, but behaves in a Neo-Keynesian way -- noise is going to look like demand shocks. I normally don't as much out of theory papers as I would like, but this one was so clearly presented that I wished we had had another 30 minutes to see some of the applications and extensions...

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