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Rational Inattention to News: The Perils of Forward Guidance

Listed author(s):
  • Gaetano Gaballo

This paper studies the social value of information about the future. In a stylized OLG model, agents need to forecast the future price level, they observe the current price and perceive with idiosyncratic noise the expectation announced by a more informed authority. When forward guidance communication is loose, the market becomes a main source of information about the future. Reliance on market information amplifies the impact of shocks on prices, which increases ex ante uncertainty and worsens agents' forecasting ability, harming social welfare. However, an appropriate policy can convert the perils of the announcement in opportunities. (JEL D83, E13, E52, E62, H63)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.20130337
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File URL: http://www.aeaweb.org/aej/mac/ds/0801/2013-0337_ds.zip
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 8 (2016)
Issue (Month): 1 (January)
Pages: 42-97

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Handle: RePEc:aea:aejmac:v:8:y:2016:i:1:p:42-97
Note: DOI: 10.1257/mac.20130337
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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