Rationally Confused: Persistent Responses to Transitory Shocks

Hassan Afrouzi

No 1467, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: In an analytical framework, we study how an economy with rationally inatten- tive firms responds to supply and demand shocks. Firms optimally choose to ignore the nature of shocks in favor of having a better estimate of how those shocks affect their prices. As a result, in our economy, when firms get signals that they should increase their price, they are confused about whether the underlying shock is a positive demand shock or a negative supply shock. This has significant implications for monetary policy: we prove that if monetary policy shocks are not persistent enough, every expansion caused by a positive policy shock will lead to a recession as firms would interpret it as a negative supply shock. This favors policies such as interest rate smoothing.

Date: 2019
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_1467.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1467

Access Statistics for this paper

More papers in 2019 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann (chuichuiche@gmail.com).