Monetary Policy, Endogenous Inattention and the Volatility Trade-off

William A. Branch, John Carlson, George W Evans, Bruce McGough

    Research output: Contribution to journalArticlepeer-review

    15 Citations (Scopus)

    Abstract

    This article considers the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimising a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down.

    Original languageEnglish
    Pages (from-to)123-157
    Number of pages35
    JournalThe Economic Journal
    Volume119
    Issue number534
    Early online date9 Dec 2008
    DOIs
    Publication statusPublished - Jan 2009

    Keywords

    • STICKY INFORMATION
    • MACROECONOMIC STABILITY
    • GENERAL EQUILIBRIUM
    • RULES
    • INFLATION
    • PRICES
    • OUTPUT
    • ECONOMIES

    Fingerprint

    Dive into the research topics of 'Monetary Policy, Endogenous Inattention and the Volatility Trade-off'. Together they form a unique fingerprint.

    Cite this