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Rational Inattention and the Business Cycle Effects of Productivity and News Shocks

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  • Mackowiak, Bartosz
  • Wiederholt, Mirko

Abstract

We solve a real business cycle model with rational inattention (an RI-RBC model). In the RI-RBC model, the growth rates of employment, investment, and output are about as persistent as in the data, with an amount of inattention consistent with survey data on expectations. Moreover, consumption, employment, and output move in the same direction in response to news about future productivity. By contrast, the baseline RBC model produces neither persistent growth rates nor business cycle comovement after news shocks.

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  • Mackowiak, Bartosz & Wiederholt, Mirko, 2022. "Rational Inattention and the Business Cycle Effects of Productivity and News Shocks," CEPR Discussion Papers 16812, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16812
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    2. Jurado, Kyle, 2023. "Rational inattention in the frequency domain," Journal of Economic Theory, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    Information choice; Rational inattention; Real business cycle model; Productivity shocks; News shocks;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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