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Endogenous Persistence with Recursive Inattentiveness

  • Lena Dräger

    ()

    (University of Hamburg and ETH Zurich)

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.

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File URL: http://www.wiso.uni-hamburg.de/repec/hepdoc/macppr_3_2011.pdf
File Function: First version, 2011
Download Restriction: no

Paper provided by Hamburg University, Department Wirtschaft und Politik in its series Macroeconomics and Finance Series with number 201103.

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Length: 35 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:hep:macppr:201103
Contact details of provider: Web page: http://www.wiso.uni-hamburg.de/dwp

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