43 research outputs found

    Business cycle dynamics under rational inattention

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    We develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other shocks. The mix of fast and slow responses of prices to shocks matches the pattern found in the empirical literature. Changes in the conduct of monetary policy yield very different outcomes than in models currently used at central banks because systematic changes in policy cause reallocation of attention by decision-makers in households and firms. JEL Classification: D83, E31, E32, E52business cycles, information choice, monetary policy, rational inattention

    Optimal sticky prices under rational inattention

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    This paper presents a model in which price setting firms decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in micro data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks. Nominal shocks have strong and persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms’ environment. JEL Classification: E3, E5, D8rational inattention, real effects of nominal shocks, sticky prices

    Macroeconomic Dynamics under Rational Inattention

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    This paper develops a general equilibrium model with Dixit-Stiglitz preferences, monopolistic competition and rational inattention on the side of both households and firms. We show how to solve a general equilibrium model with rational inattention. We use the model to study how rational inattention affects the impulse responses of macroeconomic variables to monetary policy shocks and technology shocks.

    Economic Policy Uncertainty, Trust and Inflation Expectations *

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    Abstract Theory and evidence suggest that in an environment of well-anchored expectations, temporary news or shocks to economic variables, should not affect agents' expectations of inflation in the long term. Our estimated structural VARs show that both longand short-term inflation expectations are sensible to policy-related uncertainty shocks. A rise of long-term inflation expectations in times of economic contraction, in response to such shocks, suggests that heightened policy uncertainty observed during the recent years indeed raises concerns about future inflation. Furthermore, both monetary and fiscal policy-related uncertainties are significant for the negative dynamics in citizens' trust in the ECB. JEL classification: E02, E31, E58, E63, P1

    Optimal Sticky Prices under Rational Inattention

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    In the data, individual prices change frequently and by large amounts. In standard sticky price models, frequent and large price changes imply a fast response of the aggregate price level to nominal shocks. This paper presents a model in which price setting firms optimally decide what to observe, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in the data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks. Nominal shocks have persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms´ environment

    Markets for information, allocation of capital and growth in open economies

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    Defence date: 16 June 2003Examining board: Prof. Giuseppe Bertola, EUI, Supervisor ; Prof. Timothy Besley, LSE ; Prof. Omar Licandro, EUI ; Prof. Jean-Cahrles Rochet, Université de ToulousePDF of thesis uploaded from the Library digitised archive of EUI PhD theses completed between 2013 and 201

    and Optimal Monetary Policy ∗

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    This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decisionmakers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy. JEL: E3,E5,D8

    Imperfect Information and Optimal Monetary Policy

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    Most of the analysis of optimal monetary policy is conducted with the Calvo model. This paper studies optimal monetary policy when the slow adjustment of the price level is due to imperfect information by decision-makers in firms. We consider two models: a model with exogenous dispersed information and a rational inattention model. In the model with exogenous dispersed information, complete stabilization of the price level is optimal after aggregate productivity shocks but not after markup shocks. By contrast, in the rational inattention model, complete stabilization of the price level is optimal both after aggregate productivity shocks and after markup shocks. Moreover, in the model with exogenous dispersed information, there is no value from commitment to a future monetary policy. By contrast, in the rational inattention model, there is value from commitment to a future monetary policy because then the private sector can trust the central bank that not paying attention to certain variables is optimal
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