Multi-layered rational inattention and time-varying volatility

Stephan Hobler

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Standard rational inattention models suppose that agents process noisy signals about otherwise fully revealing data. I show that introducing imperfect data quality yields new insights in settings in which volatility is time-varying. I impose a two-layered signal structure in which agents learn imperfectly about noisy sources. Treating data as only partially revealing of the true fundamental amplifies impulse responses to a second moment shock and, if data quality is sufficiently poor, can change the qualitative direction of the response. I apply my findings to the price-setting problem of firms and find that higher data quality enhances the transmission of monetary policy and reduces macroeconomic volatility. I also show how the empirically documented procyclicality of data quality has non-trivial implications for the Phillips curve.

Keywords: monetary policy; Phillips curve; rational inattention (search for similar items in EconPapers)
JEL-codes: D80 E31 E32 E42 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2022-05-01
New Economics Papers: this item is included in nep-dem, nep-mac and nep-upt
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Published in Journal of Economic Dynamics and Control, 1, May, 2022, 138. ISSN: 0165-1889

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:114913

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