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Rational inattention: a research agenda

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Sims, Christopher A.

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Abstract

The literature applying information-theoretic ideas to economics has so far considered only Gaussian uncertainty. Ex post Gaussian uncertainty can be justified as optimal when the associated optimization problem is linear-quadratic, but the literature has often assumed Gaussian uncertainty even where it cannot be justified as optimal. This paper considers a simple two-period optimal saving problem with a Shannon capacity constraint and non-quadratic utility. It derives an optimal ex post probability density for wealth in two leading cases (log and linear utility) and lays out a general approach for handling other cases numerically. It displays and discusses numerical solutions for other utility functions, and considers the feasibility of extending this paper?s approaches to general non-LQ dynamic programming problems. The introduction of the paper discusses approaches that have been taken in the existing literature to applying Shannon capacity to economic modeling, making criticisms and suggesting promising directions for further progress.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2005,34.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp1:4228

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  1. Campbell, John Y. & Hilscher, Jens & Szilagyi, Jan, 2005. "In search of distress risk," Discussion Paper Series 1: Economic Studies 2005,27, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  2. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Koetter, Michael & Bos, Jaap W. B. & Heid, Frank & Kool, Clemens J. M. & Kolari, James W. & Porath, Daniel, 2005. "Accounting for distress in bank mergers," Discussion Paper Series 2: Banking and Financial Studies 2005,09, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  1. Inoue, Atsushi & Kilian, Lutz & Kiraz, Fatma Burcu, 2006. "Do actions speak louder than words? Household expectations of inflation based on micro consumption data," Discussion Paper Series 1: Economic Studies 2006,26, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  2. 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. [Downloadable!]
  3. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April. [Downloadable!] (restricted)
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  4. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005. [Downloadable!]
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  5. Paul De Grauwe, 2008. "DSGE-Modelling - when agents are imperfectly informed," Working Paper Series 897, European Central Bank. [Downloadable!]
  6. Slacalek, Jirka & Fritsche, Ulrich & Dovern, Jonas & Döpke, Jörg, 2005. "European inflation expectations dynamics," Discussion Paper Series 1: Economic Studies 2005,37, Deutsche Bundesbank, Research Centre. [Downloadable!]
  7. Martins, Guilherme & Sinigaglia, Daniel, 2009. "Real Business Cycle Dynamics under Rational Inattention," MPRA Paper 14089, University Library of Munich, Germany. [Downloadable!]
  8. Jordi Mondria, 2006. "Financial Contagion and Attention Allocation," Working Papers tecipa-254, University of Toronto, Department of Economics. [Downloadable!]
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  9. Yulei Luo, 2006. "Rational Inattention, Portfolio Choice, and the Equity Premium," Computing in Economics and Finance 2006 56, Society for Computational Economics. [Downloadable!]
  10. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May. [Downloadable!]
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