'Rational inattention' guides overloaded brains, helps economists understand market behavior

Antonella Tutino

Economic Letter, 2011, vol. 6, issue mar, No 3

Abstract: Between Internet news sources, social media and email, people are awash in information, most of it accessible at near-zero cost. Yet, humans possess only a finite capacity to process all of it. The average email user, for example, receives dozens of messages per day. The messages can?t all receive equal attention. How carefully does someone read an email from a sibling or friend before crafting a reply? How closely does a person read an email from the boss?> ; Limitations on the ability to process information force people to make choices regarding the subjects to which they pay more or less attention. Economists have long acknowledged the existence of human cognitive capacities, but only in recent years have models embodying such limits known as ?rational inattention? found their way into mainstream macroeconomics.> ; Rational inattention models have a broad range of applications. They may reconcile relatively unchanged prices and volatile ones and how the two play out in aggregate demand in the U.S. economy. Moreover, such models can capture salient features of the business cycle, providing a rationale for sharp contractions or slower expansions. Finally, rational inattention models have significant implications for monetary policy. Since the focus of these models revolves around formation of peoples? expectations, understanding how individuals perceive the economy is instrumental to policymakers? efforts to achieve output and price stabilization objectives.

Keywords: Macroeconomics - Econometric models; Business cycles; Information technology (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://fraser.stlouisfed.org/title/6362/item/607651 Full Text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddel:y:2011:i:mar:n:v.6no.3

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Economic Letter from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().