This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs....

What can explain the persistent fluctuations observed in non-fixed exchange rates? We use a version of the Kareken-Wallace two-country overlapping generations model to explain this empirical phenomenon. The agents use an adaptive learning rule to forecast expected prices in both countries...

In this paper we examine the optimal level of central bank activism in a standard model of monetary policy with uncertainty, learning and strategic interactions. We calibrate the model using G7 data and find that the presence of strategic interactions between the central bank and private agents...

This study provides new evidence about inflation expectations formation in a highly volatile environment, in which inflation dropped dramatically from three-digits annual rate to less than 3%. Our findings, based on an Israeli survey of firms' expectations, support information rigidity theories,...

We demonstrate the asset pricing implications of investors' belief heterogeneity in the frequency of news arrival and its joint impact with heterogeneous beliefs about news content. Investors trade volatility derivatives against each other to speculate on the rate of news arrival: greater...

I consider a consumption based asset pricing model where the consumer does not know if shocks to dividends are stationary (temporary) or non-stationary (permanent). The agent uses a Bayesian learning algorithm with a bias towards recent observations to assign probability to each process. While...