Vania Esady
In macroeconomic models, economic agents are often assumed to perfectly observe the current state but in reality they have to infer current conditions (nowcast). Because of information costs, this is not always easy. Information costs are not observable in the data but it can be proxied. A good proxy is disagreement on a near-term forecast because significant disagreement indicates a period when it is difficult to observe the current economic conditions – ie higher information frictions. Suppose people’s ability to nowcast varies over time, this may affect their ability to respond to various shocks, including monetary policy shocks. My recent paper shows that when disagreement is higher, to bring down inflation, a contractionary monetary policy will lead to a greater fall in economic activity.
