Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153765
Authors: 
Maćkowiak, Bartosz
Wiederholt, Mirko
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1331
Abstract: 
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.
Subjects: 
business cycles
information choice
monetary policy
rational inattention
JEL: 
D83
E31
E32
E52
Document Type: 
Working Paper

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