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Exogenous Information, Endogenous Information, and Optimal Monetary Policy

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  • Luigi Paciello
  • Mirko Wiederholt

Abstract

This article studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy. Copyright 2014, Oxford University Press.

Suggested Citation

  • Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 356-388.
  • Handle: RePEc:oup:restud:v:81:y:2014:i:1:p:356-388
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    File URL: http://hdl.handle.net/10.1093/restud/rdt024
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    References listed on IDEAS

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    1. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
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