Models of business cycles and monetary policy under imperfect information

This thesis considers an economy in which agents have imperfect information regarding the persistence of technology growth and analyzes the implications for the properties of aggregate fluctuations and the conduct of monetary policy.; Chapter 1 develops a dynamic stochastic general equilibrium model in which transitory and persistent shocks affect technology growth. Under imperfect information, agents do not observe the two shocks separately, and therefore infer in real time whether an observed movement in technology growth is transitory or persistent. Economic decisions are made based on this inference. Properties of the model are discussed in comparison to the case of full information, as well as the case in which technology follows a random walk process. It is shown that the presence of persistent shocks to technology growth, especially under imperfect information, brings the model's predictions for the persistence of macroeconomic aggregates and the forecastable components of macroeconomic activity closer to the data. Similarity between the agents' perceptions of future technology growth in the model and the Index of Consumer Sentiment, a leading indicator of the economy, is documented, and several of the model's predictions on the relationship between agents' perceptions and economic activity are confirmed by the data.; Chapter 2 provides additional implications of the model. It is shown that, because the persistent shock to technology growth is assumed to follow a nonlinear regime-switching process, the magnitude and the sign of the shock has nontrivial implications for the way in which agents adjust their perceptions of a future technology growth. Also, a given shock to technology has different effects on the economy depending on whether agents currently believe that the economy is in an expansionary or contractionary phase of the business cycle.; Chapter 3 introduces price rigidities into the model, and considers the role of monetary policy in an economy in which both private agents and the monetary authority have imperfect information on the realizations of the transitory and persistent shocks to technology growth. Different learning rules used by private agents and monetary authority are considered, and the performance of the economy under various specifications of the monetary policy rule are compared.