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Using data on cross-sectional dispersion in forecasters’long- and short-run predictions of macroeconomic variables, we identify key sources of disagreement. Dispersion among forecasters is highest at long horizons where private information is of limited value and lower at short forecast horizons. Moreover, differences in views persist through time. Such differences in opinion cannot be explained by differences in information sets; our results indicate they stem from heterogeneity in priors or models. We also find evidence that differences in opinion move countercyclically, with heterogeneity being strongest during recessions where forecasters appear to place greater weight on their prior beliefs. Keywords: Dispersion in beliefs, heterogeneous information, term structure of forecasts.

We study optimal monetary policy in an environment in which firms ’ pricing and production decisions are subject to informational frictions. Our framework accommodates multiple formalizations of these frictions, including dispersed private information, sticky information, and certain forms of inattention. An appropriate notion of constrained efficiency is analyzed alongside the Ramsey policy problem. Similarly to the New-Keynesian paradigm, efficiency obtains with a subsidy that removes the monopoly distortion and a monetary policy that replicates flexible-price allocations. Nevertheless, “divine coincidence ” breaks down and full price stability is no more optimal. Rather, the optimal policy is to “lean against the wind”, that is, to target anegativecorrelationbetweenthepricelevelandrealeconomicactivity.

Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn “by observation ” the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents overly optimistic about the probability of persistence of a high-leverage regime. Conversely, the first realization of the low-leverage state turns agents unduly pessimistic about future credit prospects. These effects interact with the Fisherian deflation mechanism, resulting in changes in debt, leverage, and asset prices larger than predicted under either rational expectations without learning or with learning but without Fisherian deflation. The model can account for 69 percent of the rise in net household debt and 53 percent of the rise in housing prices during 1997-2006, and predicts a sharp collapse in 2007.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation " the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006,

this paper are those of the authors and should not be attributed to the International Monetary Fund

We examine the effects of two types of informational frictions, robustness (RB) and finite information-processing capacity (called rational inattention or RI) on the current account, in an otherwise standard intertemporal current account (ICA) model. We show that the interaction of RB and RI has the potential to improve the model’s predictions on the joint dynamics of the current account and income: (i) the contemporaneous correlation between the current account and income, (ii) the volatility and persistence of the current account in small open emerging and developed economies. In addition, we show that the two informational frictions could also better explain consumption dynamics in small open economies: the impulse responses of consumption to income shocks and the relative volatility of consumption growth to income growth. Calibrated versions using detection probabilities fit the data better along these dimensions than the standard model does.

This paper surveys the research in the past decade on imperfect information models of aggregate supply and the Phillips curve. This new work has emphasized that information is dispersed and disseminates slowly across a population of agents who strategically interact in their use of information. We discuss the foundations on which models of aggregate supply rest, as well as the micro‐foundations for two classes of imperfect information models: models with partial information, where agents observe economic conditions with noise, and models with delayed information, where they observe economic conditions with a lag. We derive the implications of these two classes of models for: the existence of a non‐vertical aggregate supply, the persistence of the real effects of monetary policy, the difference between idiosyncratic and aggregate shocks, the dynamics of disagreement, and the role of transparency in policy. Finally, we present some of the topics on the research frontier in this area.

We consider a class of convex, competitive, neoclassical economies in which agents are rational; the equilibrium is unique; there is no room for randomization devices; and there are no shocks to preferences, technologies, endowments, or other fundamentals. In short, we rule out every known source of macroeconomic volatility. And yet, we show that these economies can be ridden with large and persistent fluctuations in equilibrium allocations and prices. These fluctuations emerge merely because decentralized trading impedes communication and, in so doing, permits self-fulfilling waves of optimism and pessimism to obtain even when the equilibrium is unique. What is more, these fluctuations require no divergence between private and social motives. They therefore need not open the door to stabilization policy, despite their apparent arbitrariness and their total disconnect from fundamentals. This paper supersedes earlier working papers that circulated in 2008 and 2009 under the title “Sentiments” and that contained different models but a similar overall message. For stimulating discussions and feedback, we

What are the welfare effects of the information contained in macroeconomic statistics, central-bank communications, or news in the media? We address this question in a business-cycle framework that nests the neoclassical core of modern DSGE models. Earlier lessons that were based on “beauty contests ” (Morris and Shin, 2002) are found to be inapplicable. Instead, the social value of information is shown to hinge on essentially the same conditions as the optimality of output stabilization policies. More precise information is unambiguously welfare-improving as long as the business cycle is driven primarily by technology and preference shocks—but can be detrimental when shocks to markups and wedges cause sufficient volatility in “output gaps”. A numerical exploration suggests that the first scenario is more plausible.