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Exogenous Information, Endogenous Information and Optimal Monetary Policy

  • Luigi Paciello

    (EIEF)

  • Mirko Wiederholt

    (Northwestern University)

This paper 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.

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File URL: http://www.eief.it/files/2012/09/wp-04-exogenous-information-endogenous-information-and-optimal-monetary-policy.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1104.

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Length: 66 pages
Date of creation: 2011
Date of revision: Jan 2011
Handle: RePEc:eie:wpaper:1104
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  1. Stijn Van Nieuwerburgh & Laura Veldkamp, 2007. "Information Immobility and the Home Bias Puzzle," NBER Working Papers 13366, National Bureau of Economic Research, Inc.
  2. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003 263, Society for Computational Economics.
  3. repec:ste:nystbu:08-21 is not listed on IDEAS
  4. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  5. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers 06-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  7. Luigi Paciello, 2009. "Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention," EIEF Working Papers Series 0916, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2011.
  8. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  9. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  10. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  11. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  12. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1837-1864, September.
  13. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers 420, Society for Economic Dynamics.
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