Rational Inattention to News: The Perils of Forward Guidance
AbstractThis paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this information to rationally inattentive agents. At the unique REE, individual and aggregate risks can increase with the release when the monetary conduct is not "tight enough" and agents are "not attentive enough" to the news. In particular, the shorter the T, the more attentive the agents must be to avoid perverse welfare effects, whereas the notion of "tight enough" remains invariant. In this sense, efficient communication requires effective monetary policy.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 416.
Length: 39 pages
Date of creation: 2013
Date of revision:
Information Acquisition; Central Bank Communication; Monetary Policy; Social Value of Information.;
Find related papers by JEL classification:
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-19 (All new papers)
- NEP-DGE-2013-01-19 (Dynamic General Equilibrium)
- NEP-MAC-2013-01-19 (Macroeconomics)
- NEP-MON-2013-01-19 (Monetary Economics)
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- Ricardo Reis, 2013.
"Central Bank Design,"
Journal of Economic Perspectives,
American Economic Association, vol. 27(4), pages 17-44, Fall.
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