Branch, William A.Carlson, JohnEvans, George W., 1949-McGough, Bruce2005-03-222005-03-222004-12-07https://hdl.handle.net/1794/66252 p.This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing 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. This provides a potential explanation for the "Great Moderation" that began in the 1980's.531074 bytesapplication/pdfen-USExpectationsOptimal monetary policyBounded rationalityEconomic stabilizationAdaptive learningWorking Paper