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Rational inattention and the business cycle effects of productivity and news shocks

Author

Listed:
  • Maćkowiak, Bartosz
  • Wiederholt, Mirko
Abstract
We solve a real business cycle model with rational inattention (an RI-RBC model). In the RIRBC model, the growth rates of employment, investment, and output are about as persistent as in the data, with an amount of inattention consistent with survey data on expectations. Moreover, consumption, employment, and output move in the same direction in response to news about future productivity. By contrast, the baseline RBC model produces neither persistent growth rates nor business cycle comovement after news shocks. JEL Classification: D83, E32, E71

Suggested Citation

  • Maćkowiak, Bartosz & Wiederholt, Mirko, 2023. "Rational inattention and the business cycle effects of productivity and news shocks," Working Paper Series 2827, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232827
    Note: 1026376
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    References listed on IDEAS

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    1. Link, Sebastian & Peichl, Andreas & Roth, Christopher & Wohlfart, Johannes, 2023. "Information frictions among firms and households," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 99-115.
    2. Jurado, Kyle, 2023. "Rational inattention in the frequency domain," Journal of Economic Theory, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    information choice; news shocks; productivity shocks; rational inattention; real business cycle model;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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