Monetary policy, endogenous inattention, and the volatility trade-off

William Branch, John Carlson (), George Evans and Bruce McGough ()

No 411, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the \"great moderation\" that began in the 1980s.

Keywords: Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
Pages: 56 pages
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Monetary Policy, Endogenous Inattention and the Volatility Trade-off (2009)
Journal Article: Monetary Policy, Endogenous Inattention and the Volatility Trade‐off (2009)
Working Paper: Monetary Policy, Endogenous Inattention, and the Volatility Trade-off (2007)
Working Paper: Monetary Policy, Endogenous Inattention, and the Volatility Trade-off (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:0411

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DOI: 10.26509/frbc-wp-200411

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