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Endogenous Persistence with Recursive Inattentiveness

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  • Lena Dräger

    ()
    (University of Hamburg and ETH Zurich)

Abstract

The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2011.pdf
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Bibliographic Info

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201103.

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Length: 35 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:hep:macppr:201103

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Web page: http://www.wiso.uni-hamburg.de/dwp
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Keywords: Endogenous sticky information; heterogeneous expectations; DSGE models; persistence.;

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Cited by:
  1. Lamla, Michael & Dräger, Lena, 2013. "Imperfect Information and Inflation Expectations: Evidence from Microdata," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79908, Verein für Socialpolitik / German Economic Association.
  2. Dräger, Lena & Lamla, Michael J., 2012. "Updating inflation expectations: Evidence from micro-data," Economics Letters, Elsevier, vol. 117(3), pages 807-810.

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