The authors study the movements in output, consumption, and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real-business-cycle models. They show that actual forecastable movements in output have a variance about one hundred...

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close...

A model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences. The mental process used to make a choice is nonetheless optimal, subject to a constraint on available information-processing capacity that is motivated by...

The paper proposes a theory of efficient perceptual distortions, in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate, subject to a constraint on information processing capacity. The theory is shown to account for...