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Exogenous Information, Endogenous Information and Optimal Monetary Policy

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  • Luigi Paciello

    (EIEF)

  • Mirko Wiederholt

    (Northwestern University)

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 Economics 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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References

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  1. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6243, C.E.P.R. Discussion Papers.
  2. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 171-199.
  3. Laura Veldkamp & Stijn Van Nieuwerburgh, 2004. "Information Immobility and the Home Bias Puzzle," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 04-32, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  5. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics, EconWPA 0505011, EconWPA, revised 03 Jun 2005.
  6. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003, Society for Computational Economics 263, Society for Computational Economics.
  7. Luigi Paciello, 2012. "Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 44(7), pages 1375-1399, October.
  8. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(5), pages 1837-1864, September.
  9. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 06-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers, Society for Economic Dynamics 420, Society for Economic Dynamics.
  11. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  12. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  13. repec:ste:nystbu:08-21 is not listed on IDEAS
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Citations

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Cited by:
  1. Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile, Central Bank of Chile 664, Central Bank of Chile.
  2. 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.
  3. Michael Rousakis, 2013. "Expectations and Fluctuations: The Role of Monetary Policy," 2013 Meeting Papers, Society for Economic Dynamics 681, Society for Economic Dynamics.
  4. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," 2011 Meeting Papers, Society for Economic Dynamics 535, Society for Economic Dynamics.
  5. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201103, Hamburg University, Department Wirtschaft und Politik.
  6. George-Marios Angeletos & Jennifer La'O, 2011. "Optimal Monetary Policy with Informational Frictions," NBER Working Papers 17525, National Bureau of Economic Research, Inc.
  7. Kenza Benhima, 2013. "Booms and Busts with dispersed information," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 13.11, Université de Lausanne, Faculté des HEC, DEEP.
  8. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 984, University of Warwick, Department of Economics.
  9. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.
  10. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8626, C.E.P.R. Discussion Papers.

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