Inattentiveness and the Investment Channel of Monetary Policy

Abolfazl Rezghi

No 2025/025, IMF Working Papers from International Monetary Fund

Abstract: How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data suggesting that this interaction likely plays a critical role in understanding macroeconomic dynamics. In a simple model, I demonstrate that financially constrained firms tend to be more attentive to economic conditions, consistent with my empirical findings. Embedding this mechanism into a DSGE model, I show that the aggregate investment response to a monetary policy shock depends on this interaction. The model further predicts that credit-constrained firms reduce their investment after an expansionary shock due to tighter borrowing constraints and higher production costs, a prediction I empirically confirm.

Keywords: Monetary policy; Rational inattention; Financial frictions; Investment; aggregate investment response; investment channel; monetary policy shock; firm age; investment data; Inflation; Monetary expansion; Unemployment rate; General equilibrium models; Australia and New Zealand (search for similar items in EconPapers)
Pages: 60
Date: 2025-01-24
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-mon
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