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Rationally Inattentive Monetary Policy

Author

Listed:
  • Joshua Bernstein

    (Indiana University)

  • Rupal Kamdar

    (Indiana University)

Abstract

This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker?s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve.

Suggested Citation

  • Joshua Bernstein & Rupal Kamdar, 2021. "Rationally Inattentive Monetary Policy," CAEPR Working Papers 2021-003 Classification-D, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2021003
    as

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    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2021-003.pdf
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    References listed on IDEAS

    as
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    Keywords

    optimal monetary policy; rational inattention; expectations;
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