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Rationally Inattentive Monetary Policy

Author

Listed:
  • Joshua Bernstein

    (Indiana University)

  • Rupal Kamdar

    (Indiana University)

Abstract

This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker's information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should bias her limited attention towards demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve. (Copyright: Elsevier)

Suggested Citation

  • Joshua Bernstein & Rupal Kamdar, 2023. "Rationally Inattentive Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 265-296, April.
    • Handle: RePEc:red:issued:21-236
    DOI: 10.1016/j.red.2022.06.001
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    More about this item

    Keywords

    optimal monetary policy; rational inattention; expectations;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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