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Rational Inattention to News: The Perils of Forward Guidance

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  • Gaetano Gaballo

Abstract

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)

Suggested Citation

  • Gaetano Gaballo, 2016. "Rational Inattention to News: The Perils of Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 42-97, January.
  • Handle: RePEc:aea:aejmac:v:8:y:2016:i:1:p:42-97
    Note: DOI: 10.1257/mac.20130337
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. George-Marios Angeletos & Chen Lian, 2016. "Forward Guidance without Common Knowledge," NBER Working Papers 22785, National Bureau of Economic Research, Inc.
    2. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
    3. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9459-7 is not listed on IDEAS
    4. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    5. Fujiwara, Ippei & Waki, Yuichiro, 2015. "Private news and monetary policy forward guidance or (the expected virtue of ignorance)," Globalization and Monetary Policy Institute Working Paper 238, Federal Reserve Bank of Dallas.
    6. P. Andrade & G. Gaballo & E. Mengus & B. Mojon, 2015. "Forward Guidance and Heterogeneous Beliefs," Working papers 573, Banque de France.
    7. Bezerra Bisneto, João Lídio, 2016. "Communication policy with public uncertainty," Textos para discussão 431, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    8. Ricardo Reis, 2013. "Central Bank Design," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 17-44, Fall.
    9. Eric Gaus, 2014. "Adaptive Learning, Heterogeneous Expectations and Forward Guidance," Working Papers 14-03, Ursinus College, Department of Economics.
    10. Coenen, Günter & Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Nakov, Anton & Nardelli, Stefano & Persson, Eric & Strasser, Georg H., 2017. "Communication of monetary policy in unconventional times," CFS Working Paper Series 578, Center for Financial Studies (CFS).

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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