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Abstract

This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy.

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File URL: http://www.eief.it/files/2012/09/wp-04-exogenous-information-endogenous-information-and-optimal-monetary-policy.pdf
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Bibliographic Info

Paper provided by Einaudi Institute for Economic and Finance (EIEF) in its series EIEF Working Papers Series with number 1104.

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Length: 66 pages
Date of creation: 2011
Date of revision: Jan 2011
Handle: RePEc:eie:wpaper:1104

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This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-01-25 (All new papers)
• NEP-CBA-2012-01-25 (Central Banking)
• NEP-MAC-2012-01-25 (Macroeconomics)
• NEP-MON-2012-01-25 (Monetary Economics)

References

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Citations

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Cited by:

1. George-Marios Angeletos & Luigi Iovino & Jennifer La'O, 2011. "Cycles, Gaps, and the Social Value of Information," NBER Working Papers 17229, National Bureau of Economic Research, Inc.
   
   • George-Marios Angeletos & Luigi Iovino & Jennifer La'O, 2011. "Cycles, Gaps, and the Social Value of Information," Levine's Working Paper Archive 786969000000000293, David K. Levine.
2. Ernesto Pasten, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," 2012 Meeting Papers 346, Society for Economic Dynamics.
3. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series 201103, Hamburg University, Department Wirtschaft und Politik.
   
   • Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," KOF Working papers 11-285, KOF Swiss Economic Institute, ETH Zurich.
4. George-Marios Angeletos & Jennifer La'O, 2011. "Optimal Monetary Policy with Informational Frictions," NBER Working Papers 17525, National Bureau of Economic Research, Inc.
5. Filip Matejka & Alisdair McKay, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," CERGE-EI Working Papers wp442, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
   
   • Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," 2011 Meeting Papers 535, Society for Economic Dynamics.
   • Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," Boston University - Department of Economics - Working Papers Series WP2011-026, Boston University - Department of Economics.
6. Demery, David, 2012. "State-dependent pricing and the non-neutrality of money," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 933-944.
7. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 984, University of Warwick, Department of Economics.
8. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
9. Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile 664, Central Bank of Chile.

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