Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability...

This paper derives an analytical solution to a class of rational inattention problems. In Sims (2003) Section 4, the decision-maker chooses the process {Y} to track a Gaussian process {X} with loss E[(X-Y)^2] subject to a constraint on the information flow between the two processes. Sims (2003)...

Should the central bank care whether slow adjustment of the price level is due to imperfect information as in Woodford (2002) or due to adjustment costs as in the standard New Keynesian model? To answer this question, we study optimal monetary policy in a model that is an extension of Woodford...

Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability...

We study the effects of forward guidance with an approach that combines theory with experimental estimates of counterfactual expectation adjustments. Guided by the model, we conduct experiments with representative samples of the US population to study how households adjust their expectations in...

We develop a dynamic stochastic general equilibrium model with rational inattention by households and firms. Consumption responds slowly to interest rate changes because households decide to pay little attention to the real interest rate. Prices respond quickly to some shocks and slowly to other...

We study the effects of monetary policy on aggregate consumption combining a heterogeneous agent model with measured expectations under different policy counterfactuals. We express the consumption of non-hand-to-mouth households as a function of expectations only and elicit all expectations...