Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach

Wenting Song and Samuel Stern

Staff Working Papers from Bank of Canada

Abstract: This paper provides direct evidence of the importance of firm attention to macro-economic dynamics. We construct a text-based measure of firm attention to macro-economic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. We use the measure to calibrate a quantitative model of rationally inattentive firms with hetero-geneous costs of information. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

Keywords: Business fluctuations and cycles; Inflation and prices, Monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E44 E52 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-01
New Economics Papers: this item is included in nep-bec, nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-3

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