Firm Uncertainty Cycles and the Propagation of Nominal Shocks

We develop a framework to study the impact of idiosyncratic uncertainty on aggregate economic outcomes. Agents learn about individual characteristics, which receive infrequent, large, and persistent shocks. In this environment, idiosyncratic uncertainty moves in cycles, fluctuating between periods of high and low uncertainty; with additional fixed adjustment costs, the frequency and size of agents' actions also fluctuate in cycles. We apply our framework to study pricing behavior and the propagation of nominal shocks. We show, analytically and quantitatively, that idiosyncratic uncertainty cycles amplify the real effects of nominal shocks by generating cross-sectional dispersion in firms' adjustment frequency and in learning speed. (JEL D21, D81, D83, E31, E32, E52)

Information Management and Pricing in Platform Markets

We study platform markets in which the information about users’ preferences is dispersed. First, we show how the dispersion of information introduces idiosyncratic uncertainty about participation decisions and how the latter shapes the elasticity of the demands and the equilibrium prices. We then study the effects on profits, consumer surplus, and welfare of platform design, blogs, forums, conferences, advertising campaigns, post-launch disclosures, and other information management policies affecting the agents’ ability to predict participation decisions on the other side of the market.

Risk Shocks

We augment a standard monetary dynamic general equilibrium model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as risk. We find that fluctuations in risk are the most important shock driving the business cycle. (JEL D81, D82, E32, E44, L26)

Estimating Models with Dispersed Information

We conduct likelihood evaluation of a DSGE model in which firms have imperfect common knowledge. Imperfect common knowledge is found to be more successful than price stickiness à la Calvo to account for the highly persistent effects of nominal shocks on output and inflation. Our likelihood analysis suggests that firms pay little attention to aggregate nominal conditions. This paper shows that such allocation of attention is plausible because it is optimal for firms with a reasonably small size of information frictions and a size of idiosyncratic uncertainty that is in line with the micro evidence on price changes. (JEL C51, D83, E13, E23, E31)