Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The Lucas imperfect information model with imperfect common knowledge

The Lucas imperfect information model with imperfect common knowledge In the Lucas imperfect information model, output responds to unanticipated mon‑ etary shocks. We incorporate more general information structures into the Lucas model and demonstrate that output also responds to (dispersedly) anticipated mon‑ etary shocks if the information is imperfect common knowledge. Thus, the real effects of money consist of the unanticipated part and the anticipated part, and we decompose the latter into two effects, an imperfect common knowledge effect and a private information effect. We then consider an information structure composed of public and private signals. The real effects disappear when either signal reveals monetary shocks as common knowledge. However, when the precision of private information is fixed, the real effects are small not only when a public signal is very precise, but also when it is very imprecise. This implies that a more precise public signal can amplify the real effects and make the economy more volatile. Keywords Real effects · Neutrality of money · Iterated expectations · The Lucas model · Imperfect common knowledge 1 Introduction In the Lucas imperfect information model (Lucas 1972, 1973), which formalizes the idea of Phelps (1970), markets are decentralized and agents in each market have only limited information about prices in other markets. As http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Japanese Economic Review Springer Journals

The Lucas imperfect information model with imperfect common knowledge

Ui, Takashi
The Japanese Economic Review , Volume OnlineFirst – Aug 23, 2019
Download PDF
16 pages

Loading next page...
 
/lp/springer-journals/the-lucas-imperfect-information-model-with-imperfect-common-knowledge-wHF0uecv43

References (24)

Publisher
Springer Journals
Copyright
Copyright © 2019 by Japanese Economic Association
Subject
Economics; Economics, general; Microeconomics; Macroeconomics/Monetary Economics//Financial Economics; Econometrics; Development Economics; Economic History
ISSN
1352-4739
eISSN
1468-5876
DOI
10.1007/s42973-019-00003-0
Publisher site
See Article on Publisher Site

Abstract

In the Lucas imperfect information model, output responds to unanticipated mon‑ etary shocks. We incorporate more general information structures into the Lucas model and demonstrate that output also responds to (dispersedly) anticipated mon‑ etary shocks if the information is imperfect common knowledge. Thus, the real effects of money consist of the unanticipated part and the anticipated part, and we decompose the latter into two effects, an imperfect common knowledge effect and a private information effect. We then consider an information structure composed of public and private signals. The real effects disappear when either signal reveals monetary shocks as common knowledge. However, when the precision of private information is fixed, the real effects are small not only when a public signal is very precise, but also when it is very imprecise. This implies that a more precise public signal can amplify the real effects and make the economy more volatile. Keywords Real effects · Neutrality of money · Iterated expectations · The Lucas model · Imperfect common knowledge 1 Introduction In the Lucas imperfect information model (Lucas 1972, 1973), which formalizes the idea of Phelps (1970), markets are decentralized and agents in each market have only limited information about prices in other markets. As

Journal

The Japanese Economic Review – Springer Journals

Published: Aug 23, 2019

There are no references for this article.