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Monetary Policy, Endogenous Inattention and the Volatility Trade-off

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  • WilliamA. Branch
  • John Carlson
  • GeorgeW. Evans
  • Bruce McGough

Abstract

This article considers the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimising a loss function that depends on expected forecast errors and information costs. "Endogenous inattention" is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2008.02222.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 119 (2009)
Issue (Month): 534 (01)
Pages: 123-157

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Handle: RePEc:ecj:econjl:v:119:y:2009:i:534:p:123-157
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Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

References listed on IDEAS
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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
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Cited by:

  1. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  3. Wiliam Branch & George W. Evans, 2005. "Model Uncertainty and Endogenous Volatility," University of Oregon Economics Department Working Papers 2005-21, University of Oregon Economics Department, revised 26 Oct 2006.
  4. William A. Branch & John B. Carlson & George W. Evans & Bruce McGough, 2006. "Adaptive learning, endogenous inattention, and changes in monetary policy," Working Paper 0610, Federal Reserve Bank of Cleveland.
  5. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," KOF Working papers 11-285, KOF Swiss Economic Institute, ETH Zurich.
  6. Alberto Locarno, 2006. "Imperfect knowledge, adaptive learning and the bias against activist monetary policies," Temi di discussione (Economic working papers) 590, Bank of Italy, Economic Research and International Relations Area.
  7. Pfajfar, Damjan, 2013. "Formation of rationally heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1434-1452.
  8. Efrem Castelnuovo, 2006. "Monetary Policy Switch, the Taylor Curve, and the Great Moderation," Computing in Economics and Finance 2006 59, Society for Computational Economics.
  9. Gaballo, Gaetano, 2013. "Good luck or good policy? An expectational theory of macro volatility switches," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2755-2770.
  10. Cars Hommes & Domenico Massaro & Matthias Weber, 2015. "Monetary Policy under Behavioral Expectations: Theory and Experiment," Tinbergen Institute Discussion Papers 15-087/II, Tinbergen Institute.
  11. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(02), pages 369-394, March.
  12. Ricardo Reis, 2009. "Optimal Monetary Policy Rules in an Estimated Sticky-Information Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 1-28, July.

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