nep-ict New Economics Papers
on Information and Communication Technologies
Issue of 2006‒11‒04
two papers chosen by
Walter Frisch
University Vienna

  1. On information in static and dynamic factor models By Otter, Pieter W.; Jacobs, Jan P.A.M.
  2. Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement By Veldkamp, Laura; Wolfers, Justin

  1. By: Otter, Pieter W.; Jacobs, Jan P.A.M. (Groningen University)
    Abstract: This paper employs concepts from information theory in factor models. We show that in the exact factor model the whole distribution of eigenvalues of the covariance matrix contributes to the information and not only the largest ones. In addition, we derive the condition that the first q say eigenvalues diverge whereas the rest remain bounded in the static model rather than having to assume it. Finally, we calculate information in static and dynamic factor models, which can be used to find the dimensions of the factor space. We illustrate the concepts with simulation experiments.
    Date: 2006
  2. By: Veldkamp, Laura; Wolfers, Justin
    Abstract: When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks.
    Keywords: business cycles; comovement puzzle; costly information; information markets
    JEL: D82 E32
    Date: 2006–10

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