IDEAS home Printed from https://ideas.repec.org/p/hep/macppr/201002.html
   My bibliography  Save this paper

Why don't people pay attention? Endogenous Sticky Information in a DSGE Model

Author

Listed:
  • Lena Dräger

    () (University of Hamburg and ETH Zurich)

Abstract

Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule.

Suggested Citation

  • Lena Dräger, 2010. "Why don't people pay attention? Endogenous Sticky Information in a DSGE Model," Macroeconomics and Finance Series 201002, Hamburg University, Department Wirtschaft und Politik.
  • Handle: RePEc:hep:macppr:201002
    as

    Download full text from publisher

    File URL: https://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_2_2010.pdf
    File Function: Second version, 2010
    Download Restriction: no

    References listed on IDEAS

    as
    1. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 269-298.
    2. Meyer-Gohde, Alexander, 2010. "Linear rational-expectations models with lagged expectations: A synthetic method," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 984-1002, May.
    3. Michael J. Lamla & Sarah M. Lein & Jan-Egbert Sturm, 2007. "News and Sectoral Comovement," KOF Working papers 07-183, KOF Swiss Economic Institute, ETH Zurich.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Endogenous sticky information; heterogeneous expectations; DSGE models.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hep:macppr:201002. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ulrich Fritsche). General contact details of provider: http://edirc.repec.org/data/dwuhhde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.