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The great lockdown: information, noise, and macroeconomic fluctuations

Published online by Cambridge University Press:  04 February 2022

Michał Brzoza-Brzezina  and
Grzegorz Wesołowski
Michał Brzoza-Brzezina*
Affiliation:
SGH Warsaw School of Economics, Warszawa, Poland
Grzegorz Wesołowski
Affiliation:
University of Warsaw, Warszawa, Poland
*
*Corresponding author. Email: mbrzez@sgh.waw.pl
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Abstract

This paper argues that not only actual lockdowns can affect economies but also noisy information about them. We construct a New Keynesian model with imperfect information about how long the lockdown would last. On the one hand, a false signal about the lockdown lowers consumption, investment, employment, and output, and this effect can be quantitatively sizable. On the other hand, a true information about a lockdown being introduced can also be misinterpreted and hence cause an impact on agents’ decisions being quantitatively different from the one desired by the authorities. To the extent that the latter have less noisy information about future lockdowns than the private sector, they can reduce these undesired fluctuations by precisely communicating the lockdown policy. Importantly, under some circumstances only radical improvements in information precision are successful.

Keywords

COVID-19lockdownimperfect informationcommunication
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 4 , June 2023 , pp. 906 - 927
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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