Application Method of Rational Inattention Hypothesis and Rational Inattention New Keynesian Phillips Curve Creation

Shun Tonami
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Shun Tonami: University of Warwick

Warwick-Monash Economics Student Papers from Warwick Monash Economics Student Papers

Abstract: This paper gives a fresh perspective on the New Keynesian Philips Curve (NKPC) when combining the rational inattention hypothesis, which will give a new insight into backward-looking evidence. A further contribution of this paper is to give a unique application method of the development of the rational inattention hypothesis in other economic fields. This study provides the viewpoint that OLS (ordinary least squares) estimators have an imperfect information bias under the noise information model where economic agents optimize their behaviors through the rational inattention hypothesis. Specifically, the information flow constraint is redefined as the regression coefficient constraint by information theory extension. As a result, if the rational inattention hypothesis is expected to hold in economic fields, the Ridge regression can provide optimal estimations for economists in their fields by allowing them to consider the imperfect information bias through penalizing the coefficients. In empirical wook, the rational inattention model complements the NKPC by including the imperfect information bias error in the regression analysis. The estimation reveals that the imperfect information bias error can play a backward-looking role. The rational inattention NKPC introduces the backward-looking element theoretically and demonstrates inflation inertia well.

Keywords: Rational Inattention; Ridge Regression; Information Flow; Constraint; New Keynesian Philips Curve JEL classifications: C51; D8; E31 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:wrkesp:53

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