| People make choices based on the information they have. Most of the time this information is imperfect. My dissertation explores how agents behave in environments with information frictions, and the implications of these choices for macroeconomic outcomes.;The first essay explores a puzzling fact in monetary economics: nominal shocks have long lasting effects on real economic activity, beyond those implied by the frequency of price adjustment found in micro data. We develop a price-setting model that explains this gap through the interplay of menu costs and uncertainty about productivity. Uncertainty arises from firms' inability to distinguish between permanent and transitory changes in their idiosyncratic productivity. Upon the arrival of a productivity shock, a firm's uncertainty spikes up and then fades with learning until the arrival of the next shock. These uncertainty cycles, when paired with menu costs, generate recurrent episodes of high frequency of price adjustment followed by episodes of low frequency of adjustment at the firm level. This time variation in the individual adjustment frequency is consistent with empirical patterns, in particular a decreasing hazard rate of adjustment, and it is key to understand the sluggish propagation of nominal shocks.;In the second essay, we explore the role of information frictions for international trade and risk sharing. Information frictions are often invoked to explain low levels of international trade beyond those that measured trade frictions (tariffs, transportation costs, etc.) can explain. But to explain why international trade is lower then domestic trade, home firms know something that foreigners do not. Without information asymmetry, domestic trade and foreign trade would be inhibited equally. This paper incorporates a simple information asymmetry in a standard, two-country Armington trade model and studies its effect on international risk sharing and trade flows. We find that ameliorating information asymmetry---information globalization---reduces trade and international risk sharing. In other words, asymmetric information frictions behave in the opposite manner as a standard trade cost.;Many puzzles and questions can be answered with a systematic study of people's information sets, learning processes, and the implications of their behavior for aggregate outcomes. This dissertation is my contribution to such research program. |
