Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention

Luigi Paciello ()

No 916, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. Specifically, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by analytically showing how monetary policy feedback rules affect the incentives faced by firms in allocating attention. A policy rule responding more actively to inflation fluctuations induces firms to pay relatively more attention to more volatile shocks, helping to rationalize the observed behavior of prices in response to technology and monetary policy shocks.

Pages: 38 pages
Date: 2009, Revised 2011-09
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention (2012)
Journal Article: Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:0916

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