This paper analyses the implications of heteroscedasticity for optimal macroeconomic policy and welfare. We find that changes in the variance structure driven by exogenous processes like GARCH affect welfare but not the optimal feedback rule. Conversely, changes in the variance structure driven...

Dynamic rational inattention problems used to be difficult to solve. This paper provides simple, analytical results for dynamic rational inattention problems. We start from the benchmark rational inattention problem. An agent tracks a variable of interest that follows a Gaussian process. The...