IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Endogenous Persistence with Recursive Inattentiveness

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.kof.ethz.ch/publications/science/pdf/wp_285.pdf
Download Restriction: no

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 11-285.

as
in new window

Length: 35 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:kof:wpskof:11-285
Contact details of provider: Postal: Leonhardstrasse 21, CH-8092 Zürich
Phone: +41 44 632 42 39
Fax: +41 44 632 12 18
Web page: http://www.kof.ethz.ch
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jonas Dovern & Joerg Doepke & Ulrich Fritsche & Jirka Slacalek, 2006. "Sticky Information Phillips Curves: European Evidence," Macroeconomics and Finance Series 200604, Hamburg University, Department Wirtschaft und Politik.
  2. Klaus Adam, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," Econometric Society 2004 North American Winter Meetings 24, Econometric Society.
  3. Mankiw, N. Gregory & Reis, Ricardo, 2003. "What Measure of Inflation Should a Central Bank Target?," Scholarly Articles 3415322, Harvard University Department of Economics.
  4. Alexander Meyer-Gohde, 2007. "Solving Linear Rational Expectations Models with Lagged Expectations Quickly and Easily," SFB 649 Discussion Papers SFB649DP2007-069, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," NBER Working Papers 7988, National Bureau of Economic Research, Inc.
  6. WilliamA. Branch & John Carlson & GeorgeW. Evans & Bruce McGough, 2009. "Monetary Policy, Endogenous Inattention and the Volatility Trade-off," Economic Journal, Royal Economic Society, vol. 119(534), pages 123-157, 01.
  7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  9. Andres, Javier & Lopez-Salido, J. David & Nelson, Edward, 2005. "Sticky-price models and the natural rate hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1025-1053, July.
  10. N. Gregory Mankiw & Ricardo Reis, 2007. "Sticky Information in General Equilibrium," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 603-613, 04-05.
  11. Andrade, P. & Le Bihan, H., 2010. "Inattentive professional forecasters," Working papers 307, Banque de France.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  13. Laurence Ball & N Gregory Mankiw & Ricardo Reis, 2003. "Monetary Policy for Inattentive Economies," Economics Working Paper Archive 491, The Johns Hopkins University,Department of Economics.
  14. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," NBER Working Papers 8614, National Bureau of Economic Research, Inc.
  15. Coibion Olivier, 2006. "Inflation Inertia in Sticky Information Models," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-29, January.
  16. Jonas Dovern & Joerg Doepke & Ulrich Fritsche & Jirka Slacalek, 2006. "The Dynamics of European Inflation Expectations," Macroeconomics and Finance Series 200603, Hamburg University, Department Wirtschaft und Politik.
  17. Kevin J. Lansing, 2006. "Time-Varying U.S. Inflation Dynamics and the New Keynesian Phillips Curve," 2006 Meeting Papers 758, Society for Economic Dynamics.
  18. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  19. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  20. Bartosz Mackowiak & Mirko Wiederholt, 2004. "Optimal Sticky Prices under Rational Inattention," SFB 649 Discussion Papers SFB649DP2005-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Jul 2005.
  21. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
  22. Oleg Korenok, 2005. "Empirical Comparison of Sticky Price and Sticky Information Models," Macroeconomics 0510004, EconWPA.
  23. Luigi Paciello & Mirko Wiederholt, 2011. "Exogenous Information, Endogenous Information and Optimal Monetary Policy," EIEF Working Papers Series 1104, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2011.
  24. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
  25. Paul De Grauwe, 2010. "Top-Down versus Bottom-Up Macroeconomics," CESifo Working Paper Series 3020, CESifo Group Munich.
  26. Jeffrey Fuhrer, 2000. "Near-rationality and inflation in two monetary regimes, comments," Proceedings, Federal Reserve Bank of San Francisco.
  27. Mathias Trabandt, 2004. "Sticky Information vs. Sticky Prices: A Horse Race in a DSGE Framework," 2004 Meeting Papers 543, Society for Economic Dynamics.
  28. William A. Branch & John B. Carlson & George W. Evans & Bruce McGough, 2006. "Adaptive learning, endogenous inattention, and changes in monetary policy," Working Paper 0610, Federal Reserve Bank of Cleveland.
  29. Easaw Joshy & Golinelli Roberto, 2010. "Households Forming Inflation Expectations: Active and Passive Absorption Rates," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, November.
  30. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  31. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
  32. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
  33. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  34. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  35. Evans, Charles L., 2005. "Comment on: "Sticky-price models and the natural rate hypothesis"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1055-1057, July.
  36. Michael T. Kiley, 2005. "A quantitative comparison of sticky-price and sticky-information models of price setting," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  37. Paul De Grauwe, 2010. "Top-Down versus Bottom-Up Macroeconomics," CESifo Economic Studies, CESifo, vol. 56(4), pages 465-497, December.
  38. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kof:wpskof:11-285. 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: ()

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.