Information Choice in Macroeconomics and Finance

by Veldkamp, Laura L.

• ISBN13: 9780691142203
• ISBN10: 0691142203
• Format: Hardcover
• Copyright: 2011-08-22
• Publisher: Princeton Univ Pr

Summary

The financial crisis of 2008 has been called a crisis of information because uncertainty halted trading and triggered collapses in asset prices. Why did investors have so little information about what was happening? The study of information choice seeks to answer such questions, explaining why economic players know what they know--and how the information they have affects collective outcomes. Instead of assuming what people do or don't know and then working out economic predictions based on those assumptions, information choice asks what people would choose to know. Then it predicts what, given that information, they would choose to do. In this textbook, Laura Veldkamp introduces graduate students in economics and finance to this important new research. The book illustrates how information choice is used to answer questions in monetary economics, portfolio choice theory, business cycle theory, international finance, asset pricing, and other areas. It shows how to build and test applied theory models with information frictions. And it covers recent work on topics such as rational inattention, information markets, and strategic games with heterogeneous information. Illustrates how information choice is used to answer questions in monetary economics, portfolio choice theory, business cycle theory, international finance, asset pricing, and other areas Teaches how to build and test applied theory models with information frictions Covers recent research on topics such as rational inattention, information markets, and strategic games with heterogeneous information

Table of Contents

Acknowledgments	p. ix
Preliminaries	p. 1
Why Study Information Choice?	p. 3
Types of Learning Models	p. 4
Themes That Run through the Book	p. 5
Organization of the Book	p. 8
Bayesian Updating	p. 11
Normal Random Variables	p. 11
Uniform Random Variables	p. 13
The Kalman Filter	p. 13
Bayesian Updating in Continuous Time	p. 15
Mathematical References	p. 16
Exercises	p. 16
Measuring Information Flows	p. 17
Preliminaries	p. 17
Entropy and Rational Inattention	p. 18
Additive Cost in Signal Precision	p. 20
Diminishing Returns to Learning and Unlearnable Risk	p. 21
Inattentiveness	p. 22
Recognition	p. 22
Information-Processing Frictions	p. 23
Learning When Outcomes are Correlated	p. 23
What Is the Right Learning Technology?	p. 26
Appendix: Matrix Algebra and Eigen-Decompositions	p. 27
Exercises	p. 27
Games with Heterogeneous Information	p. 29
Preliminary Concepts	p. 29
Heterogeneous Information Eliminates Multiple Equilibria	p. 30
Information and Covariance: A Beauty Contest Model	p. 33
Strategic Motives in Information Acquisition	p. 36
Eample: Information Choice and Real Investment	p. 39
Public Information Acquisition and Multiple Equilibria	p. 42
Broader Themes and Related Literature	p. 44
Exercises	p. 45
Information Choice with Complementarity in Actions	p. 47
Disclosing Public Information	p. 49
Payoff Externalities and the Social Value of Information	p. 49
Coordination and Overreaction to Public Information	p. 49
Morris and Shin's Social Cost of Public Information	p. 50
Can Private Information Also Be Socially Costly?	p. 51
A More General Approach	p. 52
The Central Bank Transparency Debate	p. 53
Public Information Crowds Out Private Information	p. 53
Amador and Weill 2009	p. 53
Complementary Public and Private Information	p. 55
Private Information Makes Public Disclosures More Informative	p. 57
More Information Increases Price Volatility	p. 58
Public Information Makes Money Neutral	p. 59
Broader Themes and Paths for Future Research	p. 59
Speculative Currency Attacks	p. 60
A Coordination-Based Theory of Leadership	p. 61
Exercises	p. 62
Informational Inertia and Price-Setting	p. 63
Lucas-Phelps Model	p. 64
A Recipe for Inertia	p. 67
Inattentiveness in Price-Setting	p. 69
Rational Inattention Models of Price-Setting	p. 72
Are Prices State Dependent or Time Dependent?	p. 76
Broader Themes and Paths for Future Research	p. 80
Exercises	p. 82
Information Choice with Substitutabilty in Actions	p. 83
Information Choice and Investment Choice	p. 85
A One-Asset Model with Information Choice	p. 86
Multiple Assets and Exogenous Information	p. 91
Multiple Assets with Information Choice	p. 94
Gains to Specialization	p. 95
Identical Investors Hold Different Portfolios	p. 96
Interpreting Information Constraints in Equilibrium	p. 97
Broader Themes and Paths for Future Research	p. 99
Appendix: Computing Expected Utility	p. 101
Appendix: Correlated Assets	p. 104
Exercises	p. 105
Returns to Scale in Information	p. 107
Returns to Scale in Real Investment (One Asset)	p. 108
Gains to Specialization (N Assets)	p. 110
Result: Optimal Portfolio Choice	p. 112
Result: Optimal Information Choice	p. 113
Indifference Results	p. 114
Preference for Early Resolution of Uncertainty	p. 115
Markets for Information	p. 116
Broader Themes	p. 119
Paths for Future Research	p. 120
Exercises	p. 123
Information as an Aggregate Shock	p. 124
News about Future Productivity	p. 125
Model 1: Cross-Industry Complementarity	p. 125
Model 2: Gradual Capital Adjustment	p. 127
Matching Stock Market Fluctuations	p. 128
Empirical Evidence on News Shocks	p. 129
News about Current Productivity	p. 130
Model 3: Aggregate News Shocks	p. 130
Model 4: Confusing Private and Public News	p. 133
Broader Themes and Paths for Future Research	p. 137
Exercises	p. 138
Measurment	p. 141
Testing Information Theories	p. 143
Measuring Flows of News	p. 143
Forecast Precision	p. 144
Using Covariances to Infer Information Sets	p. 145
Realized Profits as Proxies for Information	p. 146
Information Choice as a Substitute for Information Data	p. 146
The Bid-Ask Spread and PIN	p. 149
Conclusions	p. 152
References	p. 153
Index	p. 165
Table of Contents provided by Ingram. All Rights Reserved.