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Rationally Inattentive Monetary Policy

Joshua Bernstein () and Rupal Kamdar ()
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Joshua Bernstein: Indiana University
Rupal Kamdar: Indiana University

CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper studies optimal monetary policy under rational inattention: the policy maker optimally chooses her information subject to a processing constraint. Our analytical results emphasize how the policy maker’s information choices shape her expectations and the dynamics of the macroeconomy. Paying attention to demand shocks lowers output volatility and causes untracked supply shocks to drive inflation. Because persistent supply shocks have a minor impact on interest rates under full information in the New Keynesian model, the policy maker should focus her limited attention on demand shocks. Improvements in information can explain a declining slope of the empirical Phillips curve.

Keywords: optimal monetary policy; rational inattention; expectations (search for similar items in EconPapers)
Pages: 47 pages
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-isf, nep-mac, nep-mon, nep-ore and nep-upt
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https://caepr.indiana.edu/RePEc/inu/caeprp/CAEPR2021-003.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2021003

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