Rationally inattentive macroeconomic wedges
AbstractThis paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that aconsumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 35 (2011)
Issue (Month): 3 (March)
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Web page: http://www.elsevier.com/locate/jedc
Finite Shannon capacity Macroeconomic wedges Savings decision;
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