Learning from Prices: Public Communication and Welfare

Abstract

We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that, when agents have private information about monetary shocks, the cost can dominate, in that public releases increase uncertainty about fundamentals. In some cases, public releases can create or eliminate multiple equilibria. Our results are robust to adding velocity shocks, imperfectly observable prices, large idiosyncratic shocks, and introducing a bond market.

Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity

“…Our results show that the potential non-existence of equilibria in Ganguli and Yang's framework is not robust to small perturbations in the correlation coe¢ -cient of private signal errors. Medrano and Vives (2004), Amador and Weill (2010), and Hatchondo et al (2010) explore the implications of the private learning channel from prices (respectively, on the welfare analysis of insider trading, on the welfare impact of public information, and on the ampli…cation e¤ect of aggregate exposure on asset prices) when individual exposures to an aggregate risk factor are private information. In our model, as in Amador and Weill (2010), the strength of the private learning channel from prices is the source of strategic complementarity in actions.…”

Beauty Contests and Irrational Exuberance: A Neoclassical Approach

“…The last term in condition (14) then represents the entrepreneurs' forecast of such a pricing error; this term captures a "speculative" return component akin to the one in the baseline model. From the analysis in the main text, we then have that in any equilibrium the price is given by (4) and the entrepreneurs' investment strategy is given by (5). Substituting (4) into (5), and using the facts that n z = n y /^p Step 2.…”

“…From the analysis in the main text, we then have that in any equilibrium the price is given by (4) and the entrepreneurs' investment strategy is given by (5). Substituting (4) into (5), and using the facts that n z = n y /^p Step 2. To establish existence of a equilibrium in which f3x , (3 y > 0, let b = P y /P.v -Dividing (18) by (17) In any of the equilibria identified in Proposition 2, we have that <p £ (0,1).…”

“…additional information, or in the form of the power to centralize the information that is dispersed in the economy. 4 12 Since K is a function of {9,e) and ui = 9 + 1], the equilibrium price can be expressed as a function of [8, e, rj where tt$, n u , and n z = TT y /<p 2 are the precisions of, respectively, the prior, the signal ui, and the signal z. By implication, the equilibrium asset price can be expressed as follows: P(0>£,V) = 7o + 7e6 l + 7£^+ 7^: ( Diamond and Dybvig (1983) and Obstfeld (1996).…”

“…Clearly, this possibility only reinforces the message of our paper: the mechanism we have identified can contribute to significant non-fundamental volatility, not only by amplifying the impact of correlated errors in information, but also by opening the door to additional volatility driven by sunspots. 4 Beauty contests and exuberance…”