Monetary Shocks in Models with Inattentive Producers
Luigi Paciello () and
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Fernando Alvarez: University of Chicago
No 316, 2015 Meeting Papers from Society for Economic Dynamics
We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis's (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non-negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
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Journal Article: Monetary Shocks in Models with Inattentive Producers (2016)
Working Paper: Monetary Shocks in Models with Inattentive Producers (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:316
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