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Chao Gu, Han Han, and Randall Wright

The effects of news (i.e., information innovations) are studied in dynamic general equilibrium models where liquidity matters. As a leading example, news can be announcements about monetary policy directions. In three standard theoretical environments—an overlapping generations model of fiat currency, a new monetarist model accommodating multiple payment methods, and a model of unsecured credit—transition paths are constructed between an announcement and the date at which events are realized. Although the economics is different, in each case, news about monetary policy can induce volatility in financial and other markets, with transitions displaying booms, crashes, and cycles in prices, quantities, and welfare. This is not the same as volatility based on self-fulfilling prophecies (e.g., cyclic or sunspot equilibria) studied elsewhere. Instead, the focus is on the unique equilibrium that is stationary when parameters are constant but still delivers complicated dynamics in simple environments due to information and liquidity effects. This is true even for classically-neutral policy changes. The induced volatility can be bad or good for welfare, but using policy to exploit this in practice seems difficult because outcomes are very sensitive to timing and parameters. The approach can be extended to include news of real factors, as seen in examples.


Michael P. Clements and Ana Beatriz Galvão

At a given point in time, a forecaster will have access to data on macroeconomic variables that have been subject to different numbers of rounds of revisions, leading to varying degrees of data maturity. Observations referring to the very recent past will be first-release data, or data which has as yet been revised only a few times. Observations referring to a decade ago will typically have been subject to many rounds of revisions. How should the forecaster use the data to generate forecasts of the future? The conventional approach would be to estimate the forecasting model using the latest vintage of data available at that time, implicitly ignoring the differences in data maturity across observations. The conventional approach for real-time forecasting treats the data as given, that is, it ignores the fact that it will be revised. In some cases, the costs of this approach are point predictions and assessments of forecasting uncertainty that are less accurate than approaches to forecasting that explicitly allow for data revisions. There are several ways to “allow for data revisions,” including modeling the data revisions explicitly, an agnostic or reduced-form approach, and using only largely unrevised data. The choice of method partly depends on whether the aim is to forecast an earlier release or the fully revised values.