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The two-period rational inattention model: accelerations and analyses

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  • Kurt F. Lewis

Abstract

This paper demonstrates the properties of and a solution method for the more general two-period Rational Inattention model of Sims (2006). It is shown that the corresponding optimization problem is convex and can be solved very quickly. This paper also demonstrates a computational tool well-suited to solving Rational Inattention models and further illustrates a critique raised in Sims (2006) regarding Rational Inattention models whose solutions assume parametric formulations rather than solve for their optimally-derived, non-parametric counterparts.

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File URL: http://www.federalreserve.gov/pubs/feds/2008/200822/200822pap.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-22.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-22

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Keywords: Consumption (Economics) ; Econometric models;

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References

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  1. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  2. B. D. McCullough & H. D. Vinod, 2003. "Verifying the Solution from a Nonlinear Solver: A Case Study," American Economic Review, American Economic Association, vol. 93(3), pages 873-892, June.
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Cited by:
  1. Tutino, Antonella, 2008. "The rigidity of choice: lifetime savings under information-processing constraints," MPRA Paper 16744, University Library of Munich, Germany, revised 24 Jul 2009.
  2. N. Gregory Mankiw & Ricardo Reis, 2010. "Imperfect Information and Aggregate Supply," NBER Working Papers 15773, National Bureau of Economic Research, Inc.
  3. Antonella Tutino, 2008. "The rigidity of choice: Lifecycle savings with information-processing limits," Finance and Economics Discussion Series 2008-62, Board of Governors of the Federal Reserve System (U.S.).
  4. Leonardo Melosi, 2009. "A Likelihood Analysis of Models with Information Frictions," PIER Working Paper Archive 09-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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