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Endogenous Persistence with Recursive Inattentiveness

Author

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  • Lena Dräger

    () (University of Hamburg and ETH Zurich)

Abstract

The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution.

Suggested Citation

  • Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series 201103, Hamburg University, Department Wirtschaft und Politik.
  • Handle: RePEc:hep:macppr:201103
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    Cited by:

    1. Dräger, Lena & Lamla, Michael J., 2012. "Updating inflation expectations: Evidence from micro-data," Economics Letters, Elsevier, vol. 117(3), pages 807-810.
    2. Lena Dräger & Michael Lamla, 2013. "Imperfect Information and Inflation Expectations: Evidence from Microdata," Macroeconomics and Finance Series 201301, Hamburg University, Department Wirtschaft und Politik.
    3. Lena Draeger & Michael J. Lamla, 2013. "Imperfect information and inflation expectations," KOF Working papers 13-329, KOF Swiss Economic Institute, ETH Zurich.

    More about this item

    Keywords

    Endogenous sticky information; heterogeneous expectations; DSGE models; persistence.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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