Why Don’t People Pay Attention? Endogenous Sticky Information in a DSGE Model

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and timevarying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule. Terms of use: Documents in

Endogenous Persistence with Recursive Inattentiveness

“…Reducing the size of the cost-push shock generates more persistence in inflation and a higher degree of inattentiveness towards inflation. Previous results from Dräger (2010) remain robust also with feedback from agents' switching to the model: Agents are still found to behave nearrationally as in Akerlof and Yellen (1985) and Akerlof et al (2000), in the sense that they pay closer attention to recent changes in output and inflation if the variability of the forecasted variable rises as otherwise losses from forecasting with outdated information are small. In addition to our earlier results, we find more interaction between inattentiveness towards output and inflation.…”

“…We analyze a model with endogenous sticky information, building on the one derived in Dräger (2010). Extending the models with sticky information by Mankiw and Reis (2001, 2002, we recursively derive the share of rational agents each period as an endogenous and time-varying expression.…”

“…The model equations are briefly reviewed here and we refer the reader to Dräger (2010) for detailed derivations.…”

“…In Dräger (2010), we extend the sticky information model by endogenizing the probability of being able to update to the new information set, i.e. the share of agents with rational expectations each period.…”

“…5 Robustness of the model with respect to changing values of K RE is analyzed in Dräger (2010). Generally, a higher rationality cost induces a lower share of agents with rational expectations and vice versa.…”