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Information Choice in Macroeconomics and Finance
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Table of Contents

Acknowledgments ix PART I: PRELIMINARIES 1 Chapter 1: Why Study Information Choice? 3 1.1 Types of Learning Models 4 1.2 Themes That Run through the Book 5 1.3 Organization of the Book 8 Chapter 2: Bayesian Updating 11 2.1 Normal Random Variables 11 2.2 Uniform Random Variables 13 2.3 The Kalman Filter 13 2.4 Bayesian Updating in Continuous Time 15 2.5 Mathematical References 16 2.6 Exercises 16 Chapter 3: Measuring Information Flows 17 3.1 Preliminaries 17 3.2 Entropy and Rational Inattention 18 3.3 Additive Cost in Signal Precision 20 3.4 Diminishing Returns to Learning and Unlearnable Risk 21 3.5 Inattentiveness 22 3.6 Recognition 22 3.7 Information-Processing Frictions 23 3.8 Learning When Outcomes Are Correlated 23 3.9 What Is the Right Learning Technology? 26 3.10 Appendix: Matrix Algebra and Eigen-Decompositions 27 3.11 Exercises 27 Chapter 4: Games with Heterogeneous Information 29 4.1 Preliminary Concepts 29 4.2 Heterogeneous Information Eliminates Multiple Equilibria 30 4.3 Information and Covariance: A Beauty Contest Model 33 4.4 Strategic Motives in Information Acquisition 36 4.5 Example: Information Choice and Real Investment 39 4.6 Public Information Acquisition and Multiple Equilibria 42 4.7 Broader Themes and Related Literature 44 4.8 Exercises 45 PART II: INFORMATION CHOICE WITH COMPLEMENTARITY IN ACTIONS 47 Chapter 5: Disclosing Public Information 49 5.1 Payoff Externalities and the Social Value of Information 49 5.1.1 Coordination and Overreaction to Public Information 49 5.1.2 Morris and Shin's Social Cost of Public Information 50 5.1.3 Can Private Information Also Be Socially Costly? 51 5.1.4 A More General Approach 52 5.1.5 The Central Bank Transparency Debate 53 5.2 Public Information Crowds Out Private Information 53 5.2.1 Amador and Weill 2009 53 5.2.2 Complementary Public and Private Information 55 5.2.3 Private Information Makes Public Disclosures More Informative 57 5.3 More Information Increases Price Volatility 58 5.4 Public Information Makes Money Neutral 59 5.5 Broader Themes and Paths for Future Research 59 5.5.1 Speculative Currency Attacks 60 5.5.2 A Coordination-Based Theory of Leadership 61 5.6 Exercises 62 Chapter 6: Informational Inertia and Price-Setting 63 6.1 Lucas-Phelps Model 64 6.2 A Recipe for Inertia 67 6.3 Inattentiveness in Price-Setting 69 6.4 Rational Inattention Models of Price-Setting 72 6.5 Are Prices State Dependent or Time Dependent? 76 6.6 Broader Themes and Paths for Future Research 80 6.7 Exercises 82 PART III: INFORMATION CHOICE WITH SUBSTITUTABILITY IN ACTIONS 83 Chapter 7: Information Choice and Investment Choice 85 7.1 A One-Asset Model with Information Choice 86 7.2 Multiple Assets and Exogenous Information 91 7.3 Multiple Assets with Information Choice 94 7.3.1 Gains to Specialization 95 7.3.2 Identical Investors Hold Different Portfolios 96 7.4 Interpreting Information Constraints in Equilibrium 97 7.5 Broader Themes and Paths for Future Research 99 7.6 Appendix: Computing Expected Utility 101 7.7 Appendix: Correlated Assets 104 7.8 Exercises 105 Chapter 8: Returns to Scale in Information 107 8.1 Returns to Scale in Real Investment (One Asset) 108 8.2 Gains to Specialization (N Assets) 110 8.2.1 Result: Optimal Portfolio Choice 112 8.2.2 Result: Optimal Information Choice 113 8.2.3 Indifference Results 114 8.2.4 Preference for Early Resolution of Uncertainty 115 8.3 Markets for Information 116 8.4 Broader Themes 119 8.5 Paths for Future Research 120 8.6 Exercises 123 Chapter 9: Information as an Aggregate Shock 124 9.1 News about Future Productivity 125 9.1.1 Model 1: Cross-Industry Complementarity 125 9.1.2 Model 2: Gradual Capital Adjustment 127 9.1.3 Matching Stock Market Fluctuations 128 9.1.4 Empirical Evidence on News Shocks 129 9.2 News about Current Productivity 130 9.2.1 Model 3: Aggregate News Shocks 130 9.2.2 Model 4: Confusing Private and Public News 133 9.3 Broader Themes and Paths for Future Research 137 9.4 Exercises 138 PART IV: MEASUREMENT 141 Chapter 10: Testing Information Theories 143 10.1 Measuring Flows of News 143 10.2 Forecast Precision 144 10.3 Using Covariances to Infer Information Sets 145 10.4 Realized Profits as Proxies for Information 146 10.5 Information Choice as a Substitute for Information Data 146 10.6 The Bid-Ask Spread and PIN 149 Chapter 11: Conclusions 152 References 153 Index 165

About the Author

Laura L. Veldkamp is associate professor of economics at New York University's Stern School of Business.

Reviews

"The book is well structured and well written... Veldkamp does an excellent job combining different streams of the literature of information choice. This book helped me a lot to give a structure to my partial knowledge on imperfect information."--Christian Merkl, Journal of Economics

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