The Macroeconomic Effects of Infrequent Information with Adjustment Costs

CAHIER 2097

THE MACROECONOMIC EFFECTS OF INFREQUENT INFORMATION WITH ADJUSTMENT COSTS

Marco BONOMO1

and René GARCIA2

1

Pontificia Universidade Católica do Rio de Janeiro

2

Centre de recherche et développement en économique (C.R.D.E.) and Département de sciences économiques, Université de Montréal, and CIRANO

October 1997

_______________

We would like to thank Eduardo Engel and Steve Ambler for their comments, and Carlos Viana de Carvalho and Benoit Brillon for their excellent research assistance. Financial support by the PARADI Research Program funded by the Canadian International Development Agency (CIDA) is gratefully acknowledged. The first author would also like to thank CNPq (National Research Council of Brazil) for financial support. The second author thanks the Fonds pour la formation de chercheurs et l'aide à la recherche (FCAR) of Québec for financial assistance.

RÉSUMÉ

Au cours de la dernière décennie, plusieurs articles on étudié les effets macroéconomiques que pouvaient entraîner des ajustements importants et intermittents de variables de décision microéconomiques telles que les prix, les investissements, la consommation de biens durables ou l’emploi, un comportement qui peut se justifier par la présence de coudes dans les fonctions de coûts d’ajustement. Dans ces modèles, les agents observent continuellement le niveau optimal de leur variable de décision. Dans le présent article, nous développons un modèle similaire mais où justement les agents n’observent pas continuellement ce niveau optimal car l’information arrive par intermittence comme dans le cas des publications de statistiques économiques ou des annonces de dividendes. Nous trouvons d’abord la règle optimale de décision individuelle, qui dépend à la fois du temps et de l’état de la nature. Nous développons ensuite un cadre d’agrégation afin d’étudier les implications macroéconomiques de ces règles optimales de décision individuelle. Une caractéristique distinctive de notre modèle est qu’un grand nombre d’agents tendent à agir en même temps, et ce, d’autant plus que l’incertitude est importante. L’effet moyen d’un choc agrégé est en relation inverse avec l’amplitude du choc et l’incertitude agrégée. Nous montrons que ces effets sont nettement différents des effets obtenus avec des modèles à coûts d’ajustement avec information complète.

Mots clés : effets macroéconomiques d’information intermittente, coûts d’ajustement, règles de décision optimales avec coûts d’ajustement

ABSTRACT

In the last decade, the potential macroeconomic effects of intermittent large adjustments in microeconomic decision variables such as prices, investment, consumption of durables or employment – a behavior which may be justified by the presence of kinked adjustment costs – have been studied in models where economic agents continuously observe the optimal level of their decision variable. In this paper, we develop a simple model which introduces infrequent information in a kinked adjustment cost model by assuming that agents do not observe continuously the frictionless optimal level of the control variable. Periodic releases of macroeconomic statistics or dividend announcements are examples of such infrequent information arrivals. We first solve for the optimal individual decision rule, that is found to be both state and time dependent. We then develop an aggregation framework to study the macroeconomic implications of such optimal individual decision rules. Our model has the distinct characteristic that a vast number of agents tend to act together, and more so when uncertainty is large. The average effect of an aggregate shock is inversely related to its size and to aggregate uncertainty. We show that these results differ substantially from the ones obtained with full information adjustment cost models.

Key words : macroeconomic effects of infrequent information, adjustment costs, state dependent and time dependent rules

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Figure 1 - Effect of a Positive Aggregate Shock w (with

no idiosyncratic uncertainty)