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Rational Inattention and the Business Cycle Effects of Productivity and News Shocks

Author

Listed:
  • Bartosz Maćkowiak

    (CEPR - Center for Economic Policy Research - CEPR)

  • Mirko Wiederholt

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München)

Abstract

We solve a real business cycle model with rational inattention (an RI-RBC model). In the standard model, anticipated fluctuations in productivity fail to cause business cycle comovement. In response to news about higher future productivity, consumption rises but employment and investment fall. Introducing rational inattention helps produce comovement. Agents choose an optimal signal about the state of the economy. The optimal signal turns out to confound current with expected future productivity. Labor and investment demand rise after a news shock, causing an output expansion. Rational inattention also improves the propagation of a standard productivity shock, by inducing persistence.

Suggested Citation

  • Bartosz Maćkowiak & Mirko Wiederholt, 2021. "Rational Inattention and the Business Cycle Effects of Productivity and News Shocks," SciencePo Working papers Main hal-03878704, HAL.
    • Handle: RePEc:hal:spmain:hal-03878704
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03878704
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    2. Jurado, Kyle, 2023. "Rational inattention in the frequency domain," Journal of Economic Theory, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    Information choice; Rational inattention; Real business cycle model; News shocks; Productivity shocks;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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