Why were people so unprepared for the global financial crisis, the European debt crisis, and the Fukushima nuclear accident? To address this question, we study a model in which agents make state-contingent plans - think about actions in different contingencies - subject to the constraint that...

This paper develops a dynamic stochastic general equilibrium model with rational inattention. Households and decision-makers in firms have limited attention and decide how to allocate their attention. The paper studies the implications of rational inattention for business cycle dynamics. Impulse...

We estimate impulse responses of sectoral price indexes to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard...

This paper presents a model in which price setting firms optimally decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than...

A researcher is interested in a set of variables that he wants to model with a vector autoregression and he has a dataset with more variables. Which variables from the dataset to include in the VAR, in addition to the variables of interest? This question arises in many applications of VARs, in...

This Paper proposes a new framework for interpreting a currency crisis associated with a fiscal imbalance, which we find appropriate for the analysis of contemporary economies with outstanding public debt. Unlike the first-generation literature on speculative attacks, we do not assume that money...

We review the recent literature that studies new, detailed micro data on prices. We discuss implications of the new micro data for macro models. We argue that the new micro data are helpful for macro models, but not decisive. There is no simple mapping from the frequency of price changes in...

This paper presents a model in which price setting firms decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to...

This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response...

Economists have studied for a long time how decision-makers allocate scarce resources. The recent literature on rational inattention studies how decision-makers allocate the scarce resource attention. The idea is that decision-makers have a limited amount of attention and have to decide how to...