This paper studies the implications of limited information-processing capacity (also called rational inattention) for asset pricing in a linear-quadratic permanent income model. We have two main results. First, RI increases the size of the risk adjustment to asset prices by increasing the...

Empirical evidence shows that entrepeneurs hold a large fraction of wealth, have higher saving rates than workers, and face substantial uninsurable entrepreneurial and investment risks. This paper constructs a heterogeneous-agent general equilibrium model with uninsurable entrepreneurial risk...

This paper introduces the rational inattention hypothesis (RI) -- that agents process information subject to finite channel constraints -- into a stochastic growth model with permanent technology shocks. We find that RI raises consumption volatility relative to output by introducing an...

This paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion (SID) due to noisy observations and learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of...

In this paper we examine implications of model uncertainty due to robustness (RB) for consumption-saving, market price of uncertainty, and aggregate wealth accumulation under limited information-processing capacity (rational inattention or RI) in an otherwise standard permanent income model. We...

This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to quantitatively explore how the preference for robustness (RB) affects the interest rate, the dynamics of consumption and income, and the welfare costs of model uncertainty in general...

This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003, 2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that, under the assumption of CARA utility with Gaussian shocks, the Permanent Income Hypothesis (PIH) arises in...

In this paper, we examine the joint consumption-portfolio decision of an agent with limited information-processing capacity (rational inattention or RI) in the sense of Sims (2003) within a non-linear-quadratic (non-LQ) setting. Our model predicts that, as processing capacity falls, agents...

In this paper we survey recent works on rational inattention (RI) in macroeconomics within the dynamic linear-quadratic-Gaussian (LQG) setting. We first discuss how RI affects consumption smoothness and sensitivity, precautionary savings, asset pricing, portfolio choice, and aggregate...

We study the portfolio decision of a household with limited information-processing capacity (rational inattention or RI) in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the...