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Rationally inattentive macroeconomic wedges

  • Tutino, Antonella

This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that aconsumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 3 (March)
Pages: 344-362

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:3:p:344-362
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2010. "Business Cycle Dynamics under Rational Inattention," CEPR Discussion Papers 7691, C.E.P.R. Discussion Papers.
  2. Giorgio Primiceri & Ernst Schaumburg & Andrea Tambalotti, 2006. "Intertemporal disturbances," 2006 Meeting Papers 355, Society for Economic Dynamics.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, 05.
  4. Maćkowiak, Bartosz & Wiederholt, Mirko, 2009. "Optimal sticky prices under rational inattention," Working Paper Series 1009, European Central Bank.
  5. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  6. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations; How Well Does the RBC Model Fit Postwar U.S. Data?," IMF Working Papers 04/234, International Monetary Fund.
  7. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  8. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
  9. 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.
  10. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
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