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Elasticity of attention and optimal monetary policy

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  • Luo, Shaowen
  • Tsang, Kwok Ping

Abstract

Optimal monetary policy depends on whether agents have exogenous, endogenous–inelastic, or endogenous–elastic attention. Under elastic attention, optimal monetary policy induces equilibria that are not possible under the other two settings: no attention to any shocks that generate inefficient economic fluctuations.

Suggested Citation

  • Luo, Shaowen & Tsang, Kwok Ping, 2020. "Elasticity of attention and optimal monetary policy," Economics Letters, Elsevier, vol. 194(C).
    • Handle: RePEc:eee:ecolet:v:194:y:2020:i:c:s0165176520302469
    DOI: 10.1016/j.econlet.2020.109393
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    References listed on IDEAS

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    1. Li, Wei & Luo, Yulei & Nie, Jun, 2017. "Elastic attention, risk sharing, and international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 1-20.
    2. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    3. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    4. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 356-388.
    5. Yulei Luo & Eric R. Young, 2014. "Signal Extraction And Rational Inattention," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 811-829, April.
    6. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181, Elsevier.
    7. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
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    Cited by:

    1. Shodipe Oladimeji T. & Shobande Olatunji Abdul, 2021. "Monetary Policy Dynamics in the United States," Open Economics, De Gruyter, vol. 4(1), pages 14-30, January.
    2. Avoyan, Ala & Romagnoli, Giorgia, 2023. "Paying for inattention," Economics Letters, Elsevier, vol. 226(C).

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    More about this item

    Keywords

    Rational inattention; Elasticity of attention; Optimal monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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