Monetary Policy, Endogenous Inattention and the Volatility Trade-off
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. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.
Year of publication: |
2009
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Authors: | Branch, WilliamA. ; Carlson, John ; Evans, GeorgeW. ; McGough, Bruce |
Published in: |
Economic Journal. - Royal Economic Society - RES, ISSN 1468-0297. - Vol. 119.2009, 534, p. 123-157
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Publisher: |
Royal Economic Society - RES |
Saved in:
freely available
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