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Business cycle dynamics under rational inattention

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  • Maćkowiak, Bartosz
  • Wiederholt, Mirko

Abstract

We develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast and slow responses of prices to shocks matches the pattern found in the empirical literature. Changes in the conduct of monetary policy yield very different outcomes than in models currently used at central banks because systematic changes in policy cause reallocation of attention by decision-makers in households and firms. JEL Classification: D83, E31, E32, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1331.

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Date of creation: Apr 2011
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Handle: RePEc:ecb:ecbwps:20111331

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Keywords: business cycles; information choice; monetary policy; rational inattention;

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  1. Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series 1331, European Central Bank.
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  19. Paciello, Luigi, 2009. "Monetary Policy Activism and Price Responsiveness to Aggregate Shocks under Rational Inattention," MPRA Paper 16407, University Library of Munich, Germany.
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  23. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
  24. Luigi Paciello, 2008. "The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention," EIEF Working Papers Series 0816, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2007.
  25. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers 06-14, New York University, Leonard N. Stern School of Business, Department of Economics.
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  1. Business cycle dynamics under rational inattention
    by Christian Zimmermann in NEP-DGE blog on 2011-05-02 16:13:59
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