We describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectation models. The paper also explains methods for using such an approximate solution to generate forecasts, simulated time paths for the model, and evaluations of expected...

Rational inattention theory is economic theory that recognizes that people have finite information-processing capacity, in the sense of Shannon and engineering information theory. This approach is still in the early stages of development, but it promises to provide a unified explanation for some...