Business cycle dynamics under rational inattention

Bartosz Maćkowiak and Mirko Wiederholt ()

No 1331, Working Paper Series from European Central Bank

Abstract: We develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast and slow responses of prices to shocks matches the pattern found in the empirical literature. Changes in the conduct of monetary policy yield very different outcomes than in models currently used at central banks because systematic changes in policy cause reallocation of attention by decision-makers in households and firms. JEL Classification: D83, E31, E32, E52

Keywords: business cycles; information choice; monetary policy; rational inattention (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: 1026376
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Business Cycle Dynamics under Rational Inattention (2015)
Working Paper: Business Cycle Dynamics under Rational Inattention (2010)
Working Paper: Business Cycle Dynamics under Rational Inattention (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111331

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