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Essays on applied macroeconomics, expectation formation and information

Turen Roman, JA; (2018) Essays on applied macroeconomics, expectation formation and information. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis studies the process of expectations updating and the implications of information frictions on the price-setting decisions of firms. In Chapter two I formulate a theory of expectations updating that fits the dynamics of accuracy and disagreement in a new survey dataset where agents can update at any time while observing each other's expectations. Agents use heterogeneous models and can be inattentive but, when updating, they follow Bayes' rule and assign homogeneous weights to public information. The empirical findings suggest that agents do not herd and, despite disagreement, they place high faith in their models, whereas during a crisis they lose this faith and undergo a paradigm shift. Bayesian updating fits the data well, but only in non-crisis years. Furthermore, I empirically evaluate this theory's relative strengths and weaknesses in both crisis and non-crisis years vis-a-vis several leading alternatives and find that it fits better on average and in non-crisis years. Chapter three studies price-setting decisions under Rational Inattention. Prices are set by tracking an unobserved target whose persistent distribution is also unknown. Given prior beliefs, owners choose total information to acquire as well as how they want to learn about both the outcome and its distribution. Information acquisition is then dynamic and fully-flexible in this setting. Finally in Chapter four I show that allowing for imperfect information as the unique source of rigidity, the model presented in chapter three is able to simultaneously reconcile several stylized facts from the microeconomic evidence on price-setting, both at the cross-sectional and time series levels. The model is consistent with countercyclical price dispersion and with the presence of a positive correlation between dispersion and frequency of price changes, two features supported by the data. Dynamic imperfect information endogenously generates persistence in beliefs, which is crucial to replicate the dynamic empirical behavior without further assumptions about price-rigidities.

Type: Thesis (Doctoral)
Qualification: Ph.D
Title: Essays on applied macroeconomics, expectation formation and information
Event: UCL (University College London)
Language: English
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10050251
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