Nie, Jun; Luo, Yulei; Wang, Gaowang; Young, Eric R. - Federal Reserve Bank of Kansas City - 2014
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 steady...