Attention and a Paradox of Uncertainty

Yu-Ting Chiang
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/

No 2022-004, Working Papers from Federal Reserve Bank of St. Louis

Abstract: I show that macroeconomic uncertainty during recessions can arise from people paying more attention to aggregate events. When information is dispersed, people's attempts to acquire more information can lead to higher aggregate volatility, forecast dispersion, and uncertainty about aggregate output. Information rigidity is reduced, consistent with evidence in forecast surveys, and distinct from the prediction of exogenous volatility shocks. When the model is calibrated to U.S. data, endogenous attention accounts for half of the observed fluctuations in volatility, forecast dispersion, and uncertainty. I also provide a method to solve models with varying attention and uncertainty under an infinite regress problem due to dispersed information.

Keywords: business cycles; information frictions; uncertainty; volatility; expectation formation (search for similar items in EconPapers)
JEL-codes: D8 E1 E3 E7 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2022-03-08, Revised 2024-10-08
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac and nep-ore
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DOI: 10.20955/wp.2022.004

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