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Rational inattention in the frequency domain

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  • Jurado, Kyle

Abstract

This paper solves a dynamic rational inattention problem by formulating it in the frequency domain. The main result is a rational inattention version of the classical Wiener-Kolmogorov filter. This filter permits an infinite-dimensional state vector, provides a new line of attack for obtaining closed-form solutions, and can be implemented numerically using a simple iterative algorithm. The frequency-domain approach also sheds new light on why rational inattention produces forward-looking behavior: inattentive agents are willing to accept more uncertainty about the timing of disturbances in exchange for less uncertainty about fluctuations at the most important frequencies.

Suggested Citation

  • Jurado, Kyle, 2023. "Rational inattention in the frequency domain," Journal of Economic Theory, Elsevier, vol. 208(C).
    • Handle: RePEc:eee:jetheo:v:208:y:2023:i:c:s0022053122001946
    DOI: 10.1016/j.jet.2022.105604
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    References listed on IDEAS

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    2. Meyer-Gohde, Alexander & Tzaawa-Krenzler, Mary, 2023. "Sticky information and the Taylor principle," IMFS Working Paper Series 189, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    Rational inattention; Spectral analysis; Foresight;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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