Informational Frictions in Macroeconomics

This dissertation explores the role of informational frictions in macroeconomics and highlights how these frictions influence micro-level decisions which, when aggregated, result in more volatile macroeconomic fluctuations. Chapter 1 explores the role of costly information and pricing complementarities in explaining persistent effects of monetary policy and behavior of prices at the micro level. In a setting where firms plan on when to acquire costly information, strategic complementarities in pricing generates planning complementarities. This results in a sluggish response of prices to monetary policy shocks. The calibrated model matches frequent and large price changes along with substantial non-neutralities. The chapter analyzes the effectiveness of monetary policy in the US since the 1970's and finds that it was relatively less effective in the 1970's compared to the subsequent decades. Chapter 2 explores the role of dispersed opinions about economic conditions in reinforcing economic fluctuations and the role of policy to curtail these fluctuations. Output fluctuations arising from optimism and pessimism are often believed to be inconsistent with rational expectations. I show that dispersed information together with strategic complementarity, can give rise to endogenous cycles of pessimism and optimism which amplify these fluctuations. In the model, agents try to infer both true fundamentals and what others perceive the fundamentals of the economy to be, from both private signals and common prices. More precisely, agents "Forecast the forecasts of others". Correlated forecast errors mimic pessimism and optimism. These endogenously generated correlated forecast errors interact with production and investment decisions to cause volatile swings in both current and future output. Three key results emerge. First, an economy with dispersed information features amplified output fluctuations relative to the full information economy. Importantly, prices reinforce sentiments which in turn generate more volatile and persistent fluctuations. Second, in an otherwise neoclassical economy, dispersed information implies that the perception of aggregate demand matters in the output decision of firms. Finally, these fluctuations are inefficient and aggregate demand management through pro-cyclical payroll taxes or counter-cyclical sales subsidies can be reduce volatility and improve welfare without the need for the policy maker to have an informational advantage over the private sector

Liquidity traps, capital flows

This version: September 7, 2017 (original version December 17, 2015)Cette version: 7 septembre 2017 (version originale : 17 décembre 2015)Motivated by debates surrounding international capital flows during the Great Recession, we conduct a positive and normative analysis of capital flows when a region of the global economy experiences a liquidity trap. Capital flows reduce inefficient output fluctuations in this region by inducing exchange rate movements that reallocate expenditure towards the goods it produces. Restricting capital mobility hampers such an adjustment. From a global perspective, constrained efficiency entails subsidizing capital flows to address an aggregate demand externality associated with exchange rate movements. Absent cooperation, however, dynamic terms-of-trade manipulation motives drive countries to inefficiently restrict capital flows, impeding aggregate demand stabilization

Costly Information, Planning Complementarity and the New Keynesian Phillips Curve

I show that in a setting with costly information processing, strategic complementarity in pricing, by generating planning complementatrities, results in the aggregate price responding slowly to nominal shocks even though individual firm prices change by large amounts in response to idiosyncratic shocks. Klenow and Kryvtsov (2008) conclude that none of the commonly used pricing models is capable of matching all the facts from micro data and at the same time generate a large and persistent response to monetary policy. Unlike the standard state dependent pricing models which rely on physical costs of changing prices to generate unresponsiveness of prices, I instead focus on costs of planning and processing information, a channel which researchers have found empirically more important than physical costs of changing prices in determining pricing decisions of firms. The model is able to match all the features of micro pricing data and at the same time generates a sluggish response of aggregate price to monetary policy, thus predicting a short run Phillips curve. Also, the model generates firms behavior in which they set price plans rather than prices and also shows that firms may choose to index prices to long run inflation optimally as is often assumed in New-Keynesian models. The paper highlights the fact that to explain non-neutrality in the short run, prices need not be sticky, it is just that they do not contain all the information in the short run but become informationally efficient in the long run resulting in a long run neutrality result

The Role of High-Value Agriculture in Capability Expansion: Qualitative Insights into Smallholder Cash Crop Production in Nepal, Laos and Rwanda

High-value agriculture contributes to rural incomes, but does it also contribute to expanding “human capabilities” (Sen, Development as freedom, Knopf, New York, 1999) in a durable way? Through long-term qualitative fieldwork in three landlocked LDCs—Nepal, Rwanda and Laos—resulting in over 150 interviews, we found expansions of the three analysed capabilities: paid work, mobility and social relations. Yet, those improvements were characterised by precariousness: they were mostly not resilient in the face of the economic and environmental risks that high-value agriculture entails. The only example of a durable capability expansion was found in Nepal, where women claimed social spaces through collective organisation. All three study sites showed remarkable consistency in that the considerable risk involved in cash crop production was mainly borne by farmers and rural labourers. Research on mechanisms to guard against these risks at household or individual level is warranted

Physics Potential of the ICAL detector at the India-based Neutrino Observatory (INO)

The upcoming 50 kt magnetized iron calorimeter (ICAL) detector at the India-based Neutrino Observatory (INO) is designed to study the atmospheric neutrinos and antineutrinos separately over a wide range of energies and path lengths. The primary focus of this experiment is to explore the Earth matter effects by observing the energy and zenith angle dependence of the atmospheric neutrinos in the multi-GeV range. This study will be crucial to address some of the outstanding issues in neutrino oscillation physics, including the fundamental issue of neutrino mass hierarchy. In this document, we present the physics potential of the detector as obtained from realistic detector simulations. We describe the simulation framework, the neutrino interactions in the detector, and the expected response of the detector to particles traversing it. The ICAL detector can determine the energy and direction of the muons to a high precision, and in addition, its sensitivity to multi-GeV hadrons increases its physics reach substantially. Its charge identification capability, and hence its ability to distinguish neutrinos from antineutrinos, makes it an efficient detector for determining the neutrino mass hierarchy. In this report, we outline the analyses carried out for the determination of neutrino mass hierarchy and precision measurements of atmospheric neutrino mixing parameters at ICAL, and give the expected physics reach of the detector with 10 years of runtime. We also explore the potential of ICAL for probing new physics scenarios like CPT violation and the presence of magnetic monopoles.Comment: 139 pages, Physics White Paper of the ICAL (INO) Collaboration, Contents identical with the version published in Pramana - J. Physic

Costly Information, Planning Complementarities and the Phillips Curve

Standard sticky information pricing models successfully capture the sluggish movement of aggregate prices in response to monetary policy shocks but fail at matching the magnitude and frequency of price changes at the micro level. This paper shows that in a setting where firms choose when to acquire costly information about different types of shocks, strategic complementarities in pricing generate planning complementarities. This results in firms optimally updating their information about monetary policy shocks less frequently than about idiosyncratic shocks. When calibrated to match frequent and large price changes observed in micro pricing data, the model is still capable of producing substantial non-neutralities. In addition, I use the model consistent Phillips curve and data from the Survey of Professional Forecasters to estimate the frequency at which firms update their information about monetary policy shocks. I find that the frequency of updating was higher in the 1970s compared to subsequent decades and hence conclude that monetary policy in the U.S. was relatively less effective prior to the 1980s

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

Rational Expectations Models with Higher Order Beliefs,” mimeo

Abstract This paper develops a general method of solving rational expectations models with higher order beliefs. Higher order beliefs are crucial in an environment with dispersed information and strategic complementarity, and the equilibrium policy depends on infinite higher order beliefs. It is generally believed that solving this type of equilibrium policy requires an infinite number of state variable

Costly Information, Planning Complementarity and the New Keynesian Phillips Curve

I show that in a setting with costly information processing, strategic complementarity in pricing, by generating planning complementatrities, results in the aggregate price responding slowly to nominal shocks even though individual firm prices change by large amounts in response to idiosyncratic shocks. Klenow and Kryvtsov (2008) conclude that none of the commonly used pricing models is capable of matching all the facts from micro data and at the same time generate a large and persistent response to monetary policy. Unlike the standard state dependent pricing models which rely on physical costs of changing prices to generate unresponsiveness of prices, I instead focus on costs of planning and processing information, a channel which researchers have found empirically more important than physical costs of changing prices in determining pricing decisions of firms. The model is able to match all the features of micro pricing data and at the same time generates a sluggish response of aggregate price to monetary policy, thus predicting a short run Phillips curve. Also, the model generates firms behavior in which they set price plans rather than prices and also shows that firms may choose to index prices to long run inflation optimally as is often assumed in New-Keynesian models. The paper highlights the fact that to explain non-neutrality in the short run, prices need not be sticky, it is just that they do not contain all the information in the short run but become informationally efficient in the long run resulting in a long run neutrality result.Planning Complementarity, Price Rigidity, Costly Information Acquisition, Real effects of Nominal Shocks, Forecasting, Strategic Complementarity