Monetary Policy, Endogenous Inattention, and the Volatility Trade-off
William Branch (),
John Carlson (),
George Evans () and
Bruce McGough ()
No 106, 2006 Meeting Papers from Society for Economic Dynamics
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: optimal policy; expectations; adaptive learning (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 (search for similar items in EconPapers)
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 (2007)
Working Paper: Monetary policy, endogenous inattention, and the volatility trade-off (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:106
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