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Attention and Fluctuations in Macroeconomic Uncertainty

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Abstract

This paper studies a dispersed information economy in which agents can exert costly attention to learn about an unknown aggregate state of the economy. Under certain conditions, attention and four measures of uncertainty are countercyclical: Agents pay more attention when they expect the economy to be in a bad state, and their reaction generates higher (i) aggregate output volatility, (ii) cross-sectional output dispersion, (iii) forecast dispersion about aggregate output, and (iv) subjective uncertainty about aggregate output faced by each agent. All these phenomena are prominent features of the U.S. data. When attention cost is calibrated to forecast survey data, the model generates countercyclical fluctuations in attention and uncertainty, consistent with untargeted moments from the data. Fluctuations in attention and uncertainty are higher-order properties of the model. A new method is developed to solve higher-order dynamics of the equilibrium under an infinite regress problem.

Suggested Citation

  • Yu-Ting Chiang, 2022. "Attention and Fluctuations in Macroeconomic Uncertainty," Working Papers 2022-004, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:93807
    DOI: 10.20955/wp.2022.004
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Attention and Fluctuations in Macroeconomic Uncertainty
      by Christian Zimmermann in NEP-DGE blog on 2022-04-18 14:46:30

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    More about this item

    Keywords

    business cycles; macroeconomic uncertainty; dispersed information; rational inattention;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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