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RECURSIVE INATTENTIVENESS WITH HETEROGENEOUS EXPECTATIONS

Published online by Cambridge University Press:  09 October 2015

Lena Dräger
Lena Dräger*
Affiliation:
University of Hamburg
*
Address correspondence to: Lena Dräger, Department of Economics, University of Hamburg, Von-Melle-Park 5, 20146 Hamburg, Germany; e-mail: Lena.Draeger@wiso.uni-hamburg.de.
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Abstract

We model agents' endogenous updating of information sets over time under changing macroeconomic conditions. Building on sticky information models, the degree of inattentiveness is endogenized by allowing agents to choose between a costly full-information predictor and a costless sticky-information predictor. This is modeled as a choice between discrete alternatives under rational inattention. Recursive simulation shows that the dynamic equilibrium paths of aggregate variables are highly persistent and match the moments of U.S. data better than a model with fixed sticky information or with sticky prices, especially with regard to higher moments and the degree of persistence. Predictors are chosen in line with the predictions from rational inattention models, as the aggregate degree of attentiveness increases with rising variance of the forecast variable. Moreover, the model can generate hump-shaped impulse responses of inflation to a monetary policy shock if the degree of inattentiveness is sufficiently high.

Keywords

Sticky InformationRecursive InattentivenessRational InattentionHeterogeneous ExpectationsDSGE Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 4 , June 2016 , pp. 1073 - 1100
Copyright
Copyright © Cambridge University Press 2015 

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