You are here

Working Paper Series no. 416: Rational Inattention to News: The Perils of Forward Guidance

Abstract

This paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this information to rationally inattentive agents. At the unique REE, individual and aggregate risks can increase with the release when the monetary conduct is not "tight enough" and agents are "not attentive enough" to the news. In particular, the shorter the T, the more attentive the agents must be to avoid perverse welfare effects, whereas the notion of "tight enough" remains invariant. In this sense, efficient communication requires effective monetary policy.

Gaetano Gaballo
January 2013

Classification JEL : E50, E58, E60, D83

Keywords : Information Acquisition, Central Bank Communication, Monetary Policy, Social Value of Information.

Download the PDF version of this document

publication
Working Paper Series no. 416: Rational Inattention to News: The Perils of Forward Guidance
  • Published on 01/31/2013
  • EN
  • PDF (382.48 KB)
Download (EN)

Updated on: 06/12/2018 11:09