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Business Cycle Dynamics under Rational Inattention

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  • Bartosz Mackowiak

    (European Central Bank)

  • Mirko Wiederholt

    (Northwestern University)

Abstract

This paper studies a dynamic stochastic general equilibrium model with rational inattention. Decisionmakers have limited attention and choose the optimal allocation of their attention. We study the implications of rational inattention for business cycle dynamics. For example, we study how rational inattention affects impulse responses of prices and quantities to monetary policy shocks, aggregate technology shocks and micro-level shocks.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 1059.

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Date of creation: 2008
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Handle: RePEc:red:sed008:1059

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  1. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 99(5), pages 2050-84, December.
  2. Mirko Wiederholt & Bartosz Mackowiak, 2005. "Optimal Sticky Prices under Rational Inattention," 2005 Meeting Papers, Society for Economic Dynamics 369, Society for Economic Dynamics.
  3. Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers, Society for Economic Dynamics 260, Society for Economic Dynamics.
  4. Mark Bils & Pete Klenow & Benjamin Malin, 2009. "Reset Price Inflation and the Impact of Monetary Policy Shocks," Discussion Papers, Stanford Institute for Economic Policy Research 08-041, Stanford Institute for Economic Policy Research.
  5. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
  6. Jean Boivin & Marc Giannoni & Ilian Mihov, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data," NBER Working Papers 12824, National Bureau of Economic Research, Inc.
  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. Midrigan, Virgiliu, 2006. "Menu costs, multi-product firms, and aggregate fluctuations," CFS Working Paper Series, Center for Financial Studies (CFS) 2007/13, Center for Financial Studies (CFS).
  9. Stijn Van Nieuwerburgh & Laura Veldkamp, 2007. "Information Immobility and the Home Bias Puzzle," NBER Working Papers 13366, National Bureau of Economic Research, Inc.
  10. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(3), pages 863-904, August.
  11. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  12. 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.
  13. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  14. Yulei Luo, 2005. "Consumption Dynamics under Information Processing Constraints," Macroeconomics, EconWPA 0505011, EconWPA, revised 03 Jun 2005.
  15. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers, Society for Economic Dynamics 420, Society for Economic Dynamics.
  16. Christopher D. Carroll & Jiri Slacalek & Martin Sommer, 2008. "International Evidence On Sticky Consumption Growth," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 542, The Johns Hopkins University,Department of Economics.
  17. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(5), pages 1837-1864, September.
  18. Mackowiak, Bartosz Adam & Moench, Emanuel & Wiederholt, Mirko, 2009. "Sectoral Price Data and Models of Price Setting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7339, C.E.P.R. Discussion Papers.
  19. Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series, European Central Bank 1331, European Central Bank.
  20. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 223-251.
  21. Paciello, Luigi, 2009. "Monetary Policy Activism and Price Responsiveness to Aggregate Shocks under Rational Inattention," MPRA Paper 16407, University Library of Munich, Germany.
  22. Paciello, Luigi, 2007. "The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention," MPRA Paper 5763, University Library of Munich, Germany.
  23. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Rational Attention Allocation Over the Business Cycle," NBER Working Papers 15450, National Bureau of Economic Research, Inc.
  24. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  25. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 604-41, June.
  26. Stijn Van Nieuwerburgh & Laura Veldkamp, 2008. "Information Acquisition and Under-Diversification," NBER Working Papers 13904, National Bureau of Economic Research, Inc.
  27. Antonella Tutino, 2008. "The rigidity of choice: Lifecycle savings with information-processing limits," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-62, Board of Governors of the Federal Reserve System (U.S.).
  28. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Rising Wage Inequality: The Role of Composition and Prices," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 2096, Harvard - Institute of Economic Research.
  29. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan, Palgrave Macmillan.
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  1. Business cycle dynamics under rational inattention
    by Christian Zimmermann in NEP-DGE blog on 2011-05-02 16:13:59
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