In September 2002, a new market in %u201CEconomic Derivatives%u201D was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are...

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic...

This paper investigates who incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the...

We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the...

Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation. Moreover, this disagreement shows substantial variation through time, moving with inflation, the absolute...

Shimer (2005) pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time, we don?t know why the number of unemployed workers varies so much over time. The basic Mortensen-Pissarides (1994) model does not generate nearly enough volatility in...

This paper studies a DSGE model with endogenous financial asset supply and ambiguity averse investors. An increase in uncertainty about profits leads firms to substitute away from debt and reduce shareholder payout in bad times when the equity premium is high. Regime shifts in volatility...

We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments, and that realized demand follows from the production and employment decisions of firms. We cast the Keynesian idea into a simple model...

This paper surveys the research in the past decade on imperfect information models of aggregate supply and the Phillips curve. This new work has emphasized that information is dispersed and disseminates slowly across a population of agents who strategically interact in their use of information....

We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower...