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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 17.08

Kenza Benhima and Céline Poilly

Do Misperceptions about Demand Matter?
Theory and Evidence

May 4, 2017


We assess theoretically and empirically the consequences of demand misperceptions. In a New Keynesian model with dispersed information, agents receive noisy signals about both supply and demand. Firms and consumers have an asymmetric access to information, so aggregate misperceptions of demand by the supply side can drive economic fluctuations.
The model's predictions are used to identify empirically fundamental and noise shocks on supply and demand. We exploit survey nowcast errors on both GDP growth and inflation, fundamental and noise shocks aff ecting the errors with opposite signs. We show that demand-related noise shocks have a negative eff ect on output and contribute substantially to business cycles. Additionally, monetary policy plays a key role in the transmission of demand noise.

JEL Classification: E32, D82, C32, E31

Keywords: Business cycles, information frictions, noise shocks, SVARs with sign restrictions

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