Why don't people pay attention? Endogenous Sticky Information in a DSGE Model
AbstractBuilding on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule.
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Bibliographic InfoPaper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 10-260.
Length: 51 pages
Date of creation: Jul 2010
Date of revision:
Endogenous sticky information; heterogeneous expectations; DSGE models;
Other versions of this item:
- Lena DrÃ¤ger, 2010. "Why don't people pay attention? Endogenous Sticky Information in a DSGE Model," Macroeconomics and Finance Series, Hamburg University, Department Wirtschaft und Politik 201002, Hamburg University, Department Wirtschaft und Politik.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-CBA-2010-12-18 (Central Banking)
- NEP-DGE-2010-12-18 (Dynamic General Equilibrium)
- NEP-MAC-2010-12-18 (Macroeconomics)
- NEP-MON-2010-12-18 (Monetary Economics)
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