Professional forecasters generally better predict inflation than household surveys and often outperform naïve year-ahead forecasts based on the Fed's 2 percent target. Constants, the basis of the naïve forecasts, benefit because they are not subject to month-to-month volatility

This paper studies the implications of information-processing limits on the consumption and savings behavior of households through time. It presents a dynamic model in which consumers rationally choose the size and scope of the information they want to process about their financial...

This paper argues that constraining people to choose consumption and labor under finite Shannon capacity produces results in line with U.S. business cycle data. My model has a simple partial equilibrium setting in which risk averse consumers keep high labor supply and low consumption profile at...

Consumers, forced to navigate a constant stream of economic information, are often challenged to sort through details and respond to new material. Experiments suggest that people react more forcefully to negative income shocks than to positive ones. Size also matters: Reaction to small shocks is...

This paper presents a laboratory experiment that directly tests the theoretical predictions of consumption choices under rational inattention. Subjects are asked to select consumption when income is random. They can optimally decide to reduce uncertainty about income by acquiring signals about...

I study the problem of communication between a fully informed central bank and N rationally inattentive private agents. The central bank observes a sequence of shocks that affect each agent and sends a public signal to guide their behavioral responses. I characterize the solution to the central...

We present a model where rationally inattentive agents decide how much to save while imperfectly tracking interest rate changes. Suitable assumptions on agents’ preferences and interest rate distribution allow us to derive testable theoretical predictions and their implications for monetary...