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Elasticity of attention and optimal monetary policy

Author

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  • Luo, Shaowen
  • Tsang, Kwok Ping

Abstract

Optimal monetary policy depends on whether agents have exogenous, endogenous–inelastic, or endogenous–elastic attention. Under elastic attention, optimal monetary policy induces equilibria that are not possible under the other two settings: no attention to any shocks that generate inefficient economic fluctuations.

Suggested Citation

  • Luo, Shaowen & Tsang, Kwok Ping, 2020. "Elasticity of attention and optimal monetary policy," Economics Letters, Elsevier, vol. 194(C).
    • Handle: RePEc:eee:ecolet:v:194:y:2020:i:c:s0165176520302469
    DOI: 10.1016/j.econlet.2020.109393
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    References listed on IDEAS

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    1. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    2. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
    3. Li, Wei & Luo, Yulei & Nie, Jun, 2017. "Elastic attention, risk sharing, and international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 1-20.
    4. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 356-388.
    5. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    6. Yulei Luo & Eric R. Young, 2014. "Signal Extraction And Rational Inattention," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 811-829, April.
    7. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181, Elsevier.
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    Cited by:

    1. Shodipe Oladimeji T. & Shobande Olatunji Abdul, 2021. "Monetary Policy Dynamics in the United States," Open Economics, De Gruyter, vol. 4(1), pages 14-30, January.
    2. Avoyan, Ala & Romagnoli, Giorgia, 2023. "Paying for inattention," Economics Letters, Elsevier, vol. 226(C).

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    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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