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Rational Inattention to News: The Perils of Forward Guidance

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  • Gaballo, G.

Abstract

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.

Suggested Citation

  • Gaballo, G., 2013. "Rational Inattention to News: The Perils of Forward Guidance," Working papers 416, Banque de France.
  • Handle: RePEc:bfr:banfra:416
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. George-Marios Angeletos & Chen Lian, 2016. "Forward Guidance without Common Knowledge," NBER Working Papers 22785, National Bureau of Economic Research, Inc.
    2. Eric Gaus, 2014. "Adaptive Learning, Heterogeneous Expectations and Forward Guidance," Working Papers 14-03, Ursinus College, Department of Economics.
    3. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
    4. Coenen, Günter & Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Nakov, Anton & Nardelli, Stefano & Persson, Eric & Strasser, Georg H., 2017. "Communication of monetary policy in unconventional times," CFS Working Paper Series 578, Center for Financial Studies (CFS).
    5. Paul Hubert & Fabien Labondance, 2016. "The effect of ECB forward guidance on policy expectations," Documents de Travail de l'OFCE 2016-30, Observatoire Francais des Conjonctures Economiques (OFCE).
    6. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9459-7 is not listed on IDEAS
    7. Fujiwara, Ippei & Waki, Yuichiro, 2015. "Private news and monetary policy forward guidance or (the expected virtue of ignorance)," Globalization and Monetary Policy Institute Working Paper 238, Federal Reserve Bank of Dallas.
    8. Ricardo Reis, 2013. "Central Bank Design," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 17-44, Fall.
    9. P. Andrade & G. Gaballo & E. Mengus & B. Mojon, 2015. "Forward Guidance and Heterogeneous Beliefs," Working papers 573, Banque de France.
    10. Bezerra Bisneto, João Lídio, 2016. "Communication policy with public uncertainty," Textos para discussão 431, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).

    More about this item

    Keywords

    Information Acquisition; Central Bank Communication; Monetary Policy; Social Value of Information.;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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