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Rational Inattention to News: The Perils of Forward Guidance

  • Gaballo, G.

This paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this information to rationally inattentive agents. At the unique REE, individual and aggregate risks can increase with the release when the monetary conduct is not "tight enough" and agents are "not attentive enough" to the news. In particular, the shorter the T, the more attentive the agents must be to avoid perverse welfare effects, whereas the notion of "tight enough" remains invariant. In this sense, efficient communication requires effective monetary policy.

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File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT416_01.pdf
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Paper provided by Banque de France in its series Working papers with number 416.

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Length: 39 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bfr:banfra:416
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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  1. Mirko Wiederholt & Bartosz Mackowiak, 2005. "Optimal Sticky Prices under Rational Inattention," 2005 Meeting Papers 369, Society for Economic Dynamics.
  2. Gaballo, G., 2012. "Private Uncertainty and Multiplicity," Working papers 387, Banque de France.
  3. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," IDEI Working Papers 304, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Kool, Clemens J. M. & Thornton, Daniel L., 2015. "How Effective Is Central Bank Forward Guidance?," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 303-22.
  5. Adam, Klaus, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 0223, European Central Bank.
  6. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, 07.
  7. Luca Colombo & Gianluca Femminis & Alessandro Pavan, 2014. "Information Acquisition and Welfare," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1438-1483.
  8. Filip Matejka & Christopher A. Sims, 2011. "Discrete Actions in Information-Constrained Tracking Problems," CERGE-EI Working Papers wp441, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  9. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  10. Thomas J. Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," FRB Atlanta Working Paper 2006-20, Federal Reserve Bank of Atlanta.
  11. Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE).
  12. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  13. Laura L. Veldkamp, 2011. "Information Choice in Macroeconomics and Finance," Economics Books, Princeton University Press, edition 1, number 9621, 06-2016.
  14. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
  15. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," CERGE-EI Working Papers wp408, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  16. Baeriswyl, Romain & Cornand, Camille, 2010. "The signaling role of policy actions," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 682-695, September.
  17. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers 1875, C.E.P.R. Discussion Papers.
  18. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
  19. Marc Giannoni & Christina Patterson & Marco Del Negro, 2015. "The Forward Guidance Puzzle," 2015 Meeting Papers 1529, Society for Economic Dynamics.
  20. Romain Baeriswyl, 2011. "Endogenous Central Bank Information and the Optimal Degree of Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 85-111, June.
  21. Ryan Chahrour, 2014. "Public Communication and Information Acquisition," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(3), pages 73-101, July.
  22. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  23. Jean-Paul L'Huillier & Guido Lorenzoni & Olivier J. Blanchard, 2009. "News, Noise and Fluctuations: An Empirical Exploration," 2009 Meeting Papers 99, Society for Economic Dynamics.
  24. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  25. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  26. Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile 664, Central Bank of Chile.
  27. Manuel Amador & Pierre-Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," NBER Working Papers 14255, National Bureau of Economic Research, Inc.
  28. Mauro F Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 10/91, International Monetary Fund.
  29. P. Andrade & G. Gaballo & E. Mengus & B. Mojon, 2015. "Forward Guidance and Heterogeneous Beliefs," Working papers 573, Banque de France.
  30. Luis Gonzalo Llosa & Venky Venkateswaran, 2015. "Efficiency with Endogenous Information Choice," Working Papers 2015-44, Peruvian Economic Association.
  31. Ricardo Reis, 2011. "When Should Policymakers Make Announcements?," 2011 Meeting Papers 122, Society for Economic Dynamics.
  32. Jeffrey R. Campbell & Charles L. Evans & Jonas D. M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic effects of Federal Reserve forward guidance," Working Paper Series WP-2012-03, Federal Reserve Bank of Chicago.
  33. Ryan Chahrour & Manoj Atolia, 2015. "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model," 2015 Meeting Papers 398, Society for Economic Dynamics.
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