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Inattentiveness and the Investment Channel of Monetary Policy

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  • Abolfazl Rezghi

Abstract

How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data suggesting that this interaction likely plays a critical role in understanding macroeconomic dynamics. In a simple model, I demonstrate that financially constrained firms tend to be more attentive to economic conditions, consistent with my empirical findings. Embedding this mechanism into a DSGE model, I show that the aggregate investment response to a monetary policy shock depends on this interaction. The model further predicts that credit-constrained firms reduce their investment after an expansionary shock due to tighter borrowing constraints and higher production costs, a prediction I empirically confirm.

Suggested Citation

  • Abolfazl Rezghi, 2025. "Inattentiveness and the Investment Channel of Monetary Policy," IMF Working Papers 2025/025, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2025/025
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