Monetary Policy, Endogenous Inattention, and the Volatility Trade-off

William A. Branch (), John Carlson (), George William Evans () and Bruce McGough ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "Great Moderation" that began in the 1980's.

Keywords: expectations; optimal monetary policy; bounded rationality; economic stability; adaptive learning (search for similar items in EconPapers)
JEL-codes: E52 E31 D83 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2004-12-07
View list of references View citations in EconPapers

Downloads: (external link)
http://economics.uor ... vans_Inattention.pdf (application/pdf)

Related works:
Working Paper: Monetary policy, endogenous inattention, and the volatility trade-off (2004)
Working Paper: Monetary Policy, Endogenous Inattention, and the Volatility Trade-off (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in University of Oregon Economics Department Working Papers from University of Oregon Economics Department
Contact information at EDIRC.
Series data maintained by Bill Harbaugh ().