A procedure to evaluate cyclical fluctuations under superior information

Abstract

This article presents and assesses a procedure to evaluate conventional moments characterizing fluctuations at the business cycle frequency, when the economic agents' information set is superior to the econometrician's one. First, we derive the theoretical conditions under which the econometrician obtains valid statistics for the moments from laws of motion for forcing variables that fully recover the agents’ superior information. Second, we use a new-Keynesian monetary model to document the numerical properties of the statistics when the laws of motion are possibly misspecified and to assess the ability of certain information criteria to detect the presence of superior information.

Acknowledgement

D. Larocque acknowledges financial support from NSERC and FQRNT. M. Normandin acknowledges financial support from SSHRC and FQRSC. We thank Martin Boileau, Jean Boivin and Hafedh Bouakez for useful comments.