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Title:Endogenous persistence with recursive inattentiveness PDF Logo
Authors:Dräger, Lena
Issue Date:2011
Series/Report no.:KOF working papers // KOF Swiss Economic Institute, ETH Zurich 285
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.
Subjects:Endogenous sticky information
heterogeneous expectations
DSGE models
persistence
JEL:E31
E37
E52
Persistent Identifier of the first edition:doi:10.3929/ethz-a-006543954
Document Type:Working Paper
Appears in Collections:KOF Working Papers, KOF Konjunkturforschungsstelle, ETH Zürich

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