Monetary Policy, Endogenous Inattention, and the Volatility Trade-off

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Title: Monetary Policy, Endogenous Inattention, and the Volatility Trade-off
Author: Branch, William A.; Carlson, John; Evans, George W., 1949-; McGough, Bruce
Abstract: 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.
Description: 52 p.
URI: http://hdl.handle.net/1794/662
Date: 2004-12-07


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