Document Type
Discussion Paper
Publication Date
12-1-2013
CFDP Number
1928R2
CFDP Revision Date
2014-10-01
CFDP Pages
65
Abstract
In an economy of interacting agents with both idiosyncratic and aggregate shocks, we examine how the structure of private information influences aggregate volatility. The maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and aggregate shocks, and display excess response to the aggregate shocks, as in Lucas [14]. For any given variance of aggregate shocks, the upper bound on aggregate volatility is linearly increasing in the variance of the idiosyncratic shocks. Our results hold in a setting of symmetric agents with linear best responses and normal uncertainty. We establish our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure. This tractable characterization, extending results in Bergemann and Morris [8], can be used to address a wide variety of questions linking information with the statistical moments of the economy.
Recommended Citation
Bergemann, Dirk; Heumann, Tibor; and Morris, Stephen, "Information and Volatility" (2013). Cowles Foundation Discussion Papers. 2325.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2325