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Nominal rigidities, rational inattention, and the optimal monetary policy

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Listed:
  • Ou, Shengliang
  • Yin, Penghui
  • Zhang, Donghai
  • Zhang, Renbin

Abstract

Optimal monetary policy has traditionally assigned greater importance to stabilizing prices in sectors with stickier prices, based on multi-sector models assuming full information or exogenous information frictions. This paper challenges the prevailing policy prescription by introducing rational inattention with endogenous information acquisition. Interestingly, the optimal policy assigns a smaller weight to sectors with stickier prices when the cost of information acquisition is sufficiently high. This counterintuitive result arises from the endogenous relationship between firms’ attention and nominal rigidities: firms in sectors with more flexible prices pay less attention to macroeconomic conditions. We provide empirical evidence supporting this mechanism.

Suggested Citation

  • Ou, Shengliang & Yin, Penghui & Zhang, Donghai & Zhang, Renbin, 2026. "Nominal rigidities, rational inattention, and the optimal monetary policy," Journal of Economic Theory, Elsevier, vol. 232(C).
    • Handle: RePEc:eee:jetheo:v:232:y:2026:i:c:s0022053125001759
    DOI: 10.1016/j.jet.2025.106129
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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