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Exogenous Information, Endogenous Information and Optimal Monetary Policy

Author

Listed:
  • Luigi Paciello

    (EIEF)

  • Mirko Wiederholt

    (Northwestern University)

Abstract

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.

Suggested Citation

  • Luigi Paciello & Mirko Wiederholt, 2011. "Exogenous Information, Endogenous Information and Optimal Monetary Policy," EIEF Working Papers Series 1104, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2011.
    • Handle: RePEc:eie:wpaper:1104
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    References listed on IDEAS

    as
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