Dynamic Rational Inattention and the Phillips Curve
Hassan Afrouzi and
Choongryul Yang
No 8840, CESifo Working Paper Series from CESifo
Abstract:
We develop a fast, tractable, and robust method for solving the transition path of dynamic rational inattention problems in linear-quadratic-Gaussian settings. As an application of our general framework, we develop an attention-driven theory of dynamic pricing in which the Phillips curve slope is endogenous to systematic aspects of monetary policy. In our model, when the monetary authority is more committed to stabilizing nominal variables, rationally inattentive firms pay less attention to changes in their input costs, which leads to a flatter Phillips curve and more anchored inflation expectations. This effect, however, is not symmetric. A more dovish monetary policy flattens the Phillips curve in the short-run but generates a steeper Phillips curve in the long-run. In a calibrated version of our general equilibrium model, we find that our mechanism quantifies a 75% decline in the slope of the Phillips curve in the post-Volcker period, relative to the period before it.
Keywords: rational inattention; dynamic information acquisition; Phillips curve (search for similar items in EconPapers)
JEL-codes: D83 D84 E03 E58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (30)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8840
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