Faculty of Economics and Business Administration Publications Database

Exogenous Information, Endogenous Information and Optimal Monetary Policy

Selected
Authors:
Paciello, Luigi
Source:
Volume: 81
Number: 1
Pages: 356 - 388
ISSN-Print: 0034-6527
Link External Source: Online Version
Year: 2014
Keywords: Optimal monetary policy; Dispersed information; Rational inattention; Information frictions
Abstract:

This article studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers 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.

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