The Rational Inattention Filter

Bartosz Maćkowiak, MatÄ›jka, Filip and Mirko Wiederholt
Authors registered in the RePEc Author Service: Filip Matejka

No 11237, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Dynamic rational inattention problems used to be difficult to solve. This paper provides simple, analytical results for dynamic rational inattention problems. We start from the benchmark rational inattention problem. An agent tracks a variable of interest that follows a Gaussian process. The agent chooses how to pay attention to this variable. The agent aims to minimize, say, the mean squared error subject to a constraint on information flow, as in Sims (2003). We prove that if the variable of interest follows an ARMA(p,q) process, the optimal signal is about a linear combination of {X(t),…,X(t-p+1)} and {e(t),…,e(t-q+1)}, where X(t) denotes the variable of interest and e(t) denotes its period t innovation. The optimal signal weights can be computed from a simple extension of the Kalman filter: the usual Kalman filter equations in combination with first-order conditions for the optimal signal weights. We provide several analytical results regarding those signal weights. We also prove the equivalence of several different formulations of the information flow constraint. We conclude with general equilibrium applications from Macroeconomics.

Keywords: Rational inattention; Kalman filter; Macroeconomics (search for similar items in EconPapers)
JEL-codes: C61 D83 E30 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-ets, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The rational inattention filter (2017)
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