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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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Length: 74 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:ecb:ecbwps:20111331

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Related research

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

Other versions of this item:

Find related papers by JEL classification:

• D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
• E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
• E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
• E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-04-30 (All new papers)
• NEP-CBA-2011-04-30 (Central Banking)
• NEP-DGE-2011-04-30 (Dynamic General Equilibrium)
• NEP-MAC-2011-04-30 (Macroeconomics)
• NEP-MON-2011-04-30 (Monetary Economics)

References

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26. repec:bla:restud:v:76:y:2009:i:1:p:223-251 is not listed on IDEAS
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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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