Skip to main content
Article thumbnail
Location of Repository

Endogenous Persistence with Recursive Inattentiveness

By Lena Dräger

Abstract

The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution.Endogenous sticky information, heterogeneous expectations, DSGE models, persistence.

OAI identifier:

Suggested articles

Citations

  1. (2007). A Quantitative Comparison of Sticky-Price and StickyInformation Models of Price Setting.
  2. (2006). Adaptive Learning, Endogenous Inattention and Changes in Monetary Policy. Federal Reserve Bank of Cleveland Working
  3. (1997). An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy.
  4. (2008). Animal Spirits and Monetary Policy. CESifo Working Paper 2418.
  5. (2008). Empirical comparison of sticky price and sticky information models.
  6. (2011). Exogenous Information, Endogenous Information and Optimal Monetary Policy. Working Paper.
  7. (2009). Experimental Evidence on Inflation Expectation Formation.
  8. (1997). Hommes
  9. (2010). Households Forming Inflation Expectations: Active and Passive Absorption Rates. The B.E.
  10. (2010). How Do Households Form Inflation Expectations? – Evidence From a Mixture Model of Survey Heterogeneity.
  11. (2003). Implications of Rational Inattention.
  12. (2006). Inattentive Producers.
  13. (2010). Inattentive Professional Forecasters. Banque de France Working Paper Series 307.
  14. (2006). Inflation Inertia in Sticky Information Models. The B.E.
  15. (1995). Inflation Persistence.
  16. (2010). Linear rational-expectations models with lagged expectations: A synthetic method.
  17. (2003). Macroeconomic Expectations of Households and Professional Forecasters.
  18. (2009). Monetary policy and aggregate volatility.
  19. (2009). Monetary Policy and Determinacy - A StickyInformation Perspective.
  20. (2005). Monetary Policy for Inattentive Economies.
  21. (2009). Monetary Policy, Endogenous Inattention and the Volatility Trade-off.
  22. (2000). Near-Rationality and Inflation in Two Monetary Regimes.
  23. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy.
  24. (2007). Optimal monetary policy with imperfect common knowledge.
  25. (2009). Optimal Sticky Prices under Rational Inattention.
  26. (2001). Should Monetary Policy Respond Strongly to Output Gaps?
  27. Slacalek (2008a). Sticky Information Phillips Curves: European Evidence.
  28. Slacalek (2008b). The Dynamics of European Inflation Expectations.
  29. (2007). Sticky Information in General Equilibrium.
  30. (2002). Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve.
  31. (2007). Sticky Information vs. Sticky Prices: A Horse Race in a DSGE Framework. Kiel Institute for the World Economy Working Paper 1369.
  32. (2001). Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps.
  33. (2005). Sticky-Price Models and the Natural Rate Hypothesis.
  34. (1981). Structural Analysis of Discrete Data with Econometric Applications.
  35. (1985). Supplement). A Near-Rational Model of the Business Cycle, With Wage and Price Inertia.
  36. (1980). The Solution of Linear Difference Models under Rational Expectation.
  37. (1997). The Time-Varying NAIRU and its Implications for Economic Policy.
  38. (2009). Time-varying U.S. inflation dynamics and the New Keynesian Phillips curve.
  39. (2010). Top-Down versus Bottom-Up Macroeconomics.
  40. (2003). What Measure of Inflation Should A Central Bank Target?
  41. (2010). Why don’t people pay attention? Endogenous Sticky Information in a DSGE Model. KOF Swiss Economic Institute Working Paper 260.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.