TY  - JOUR
AU  - Hassan, Tarek A
AU  - Mertens, Thomas M
TI  - Information Aggregation in a DSGE Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 20193
PY  - 2014
Y2  - June 2014
DO  - 10.3386/w20193
UR  - http://www.nber.org/papers/w20193
L1  - http://www.nber.org/papers/w20193.pdf
N1  - Author contact info:
Tarek Alexander Hassan
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
Tel: 773/834-3291
Fax: 773/753-0851
E-Mail: thassan@bu.edu

Thomas Mertens
Federal Reserve Bank of San Francisco
Economic Research - Finance
101 Market Street, Mail stop 1130
San Francisco, CA 94105
Tel: (415) 977-3868
E-Mail: thomas.mertens@sf.frb.org
M1  - published as Tarek A. Hassan, Thomas M. Mertens. "Information Aggregation in a Dynamic Stochastic General Equilibrium Model," in Jonathan A. Parker and Michael Woodford, editors, "NBER Macroeconomics Annual 2014, Volume 29" University of Chicago Press (2015)

M3  - presented at "29th Annual Conference on Macroeconomics", April 11-12, 2014
AB  - We introduce the information microstructure of a canonical noisy rational expectations model (Hellwig, 1980) into the framework of a conventional real business cycle model. Each household receives a private signal about future productivity. In equilibrium, the stock price serves to aggregate and transmit this information. We find that dispersed information about future productivity affects the quantitative properties of our real business cycle model in three dimensions. First, households' ability to learn about the future affects their consumption-savings decision. The equity premium falls and the risk-free interest rate rises when the stock price perfectly reveals innovations to future productivity. Second, when noise trader demand shocks limit the stock market's capacity to aggregate information, households hold heterogeneous expectations in equilibrium. However, for a reasonable size of noise trader demand shocks the model cannot generate the kind of disagreement observed in the data. Third, even moderate heterogeneity in the equilibrium expectations held by households has a sizable effect on the level of all economic aggregates and on the correlations and standard deviations produced by the model. For example, the correlation between consumption and investment growth is 0.29 when households have no information about the future, but 0.41 when information is dispersed.
ER  -