Noisy Business Cycles

Our departure from the pertinent literature is motivated by the following considerations. First, the empirical relevance of theories that require significant lack of information, or some type of unawareness, about the current monetary policy is debatable. Indeed, the first generation of the aforementioned literature succumbed to the criticism that such information is widely, readily, and cheaply available.1 Second, we contend that the dispersion of information about the real shocks hitting the economy is more severe than the one about the conduct of monetary policy. In the recent crisis, for example, there appears to be far more uncertainty, and disagreement, about nonmonetary factors such as the value of certain assets, the health of the financial system, or the broader economic fundamentals. And yet, the pertinent literature has little to say about how the heterogeneity of information about the real underlying economic fundamentals matters for business cycles. Finally, even if one is ultimately interested in a monetary model, understanding the positive and normative properties of its underlying real backbone is an essential first step.