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Optimal policy under uncertainty and rational inattention

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  • Herzog, Bodo

Abstract

This paper generalizes the theory of policy uncertainty with the new literature on rational inattention. First, the model demonstrates that inattention is dependent on the signal variance and the policy parameter. Second, I discover a novel trade-off showing that a policy instrument mitigates attention. Third, the policy instrument is non-linear and reciprocal to both the size and variance of the signal. The unifying theory creates new implications to economic theory and public policy alike.

Suggested Citation

  • Herzog, Bodo, 2019. "Optimal policy under uncertainty and rational inattention," Research in International Business and Finance, Elsevier, vol. 50(C), pages 444-449.
    • Handle: RePEc:eee:riibaf:v:50:y:2019:i:c:p:444-449
    DOI: 10.1016/j.ribaf.2019.07.002
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    Cited by:

    1. Bodo Herzog, 2021. "Sustainable Consumer Tax Evasion Theory under Information Inattention," Sustainability, MDPI, vol. 13(2), pages 1-13, January.
    2. Tabash, Mosab I. & Farooq, Umar & Ashfaq, Khurram & Tiwari, Aviral Kumar, 2022. "Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Rational inattention; Trade-Off; Policy uncertainty; Unifying modelling;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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