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Monetary Policy, Endogenous Inattention and the Volatility Trade-off

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

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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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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