Business Cycle Dynamics under Rational Inattention

Bartosz Maćkowiak and Mirko Wiederholt ()

No 7691, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a dynamic stochastic general equilibrium model with rational inattention. Households and decision-makers in firms have limited attention and decide how to allocate their attention. The paper studies the implications of rational inattention for business cycle dynamics. Impulse responses in the model have several properties of empirical impulse responses. Prices respond slowly to monetary policy shocks, faster to aggregate TFP shocks, and very quickly to disaggregate shocks. Therefore, profit losses due to deviations of the actual price from the profit-maximizing price are an order of magnitude smaller than in the Calvo model that generates the same real effects. Consumption responds slowly to aggregate shocks. For standard parameter values, deviations from the consumption Euler equation are cheap in utility terms, implying that households devote little attention to the consumption-saving decision and react slowly to changes in the real interest rate.

Keywords: Business cycles; Dynamic stochastic general equilibrium; Information choice; Monetary policy; Rational inattention (search for similar items in EconPapers)
JEL-codes: D83 E31 E32 E52 (search for similar items in EconPapers)
Date: 2010-02
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Citations: View citations in EconPapers (69)

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Related works:
Journal Article: Business Cycle Dynamics under Rational Inattention (2015)
Working Paper: Business cycle dynamics under rational inattention (2011)
Working Paper: Business Cycle Dynamics under Rational Inattention (2008)
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