Multi-layered rational inattention and time-varying volatility

Stephan Hobler

Journal of Economic Dynamics and Control, 2022, vol. 138, issue C

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: Rational inattention; Phillips curve; Monetary policy (search for similar items in EconPapers)
JEL-codes: D8 E31 E32 E42 E52 E7 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:138:y:2022:i:c:s016518892200077x

DOI: 10.1016/j.jedc.2022.104372

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