Monetary Policy, Endogenous Inattention, and the Volatility Trade-off
William Branch (),
John Carlson (),
George Evans () and
Bruce McGough ()
University of Oregon Economics Department Working Papers from University of Oregon Economics Department
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 1980's.
Keywords: expectations; optimal monetary policy; bounded rationality; economic stability; adaptive learning (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 E52 (search for similar items in EconPapers)
Date: 2004-12-07, Revised 2007-05-15
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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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 (2006)
Working Paper: Monetary policy, endogenous inattention, and the volatility trade-off (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2004-19
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