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Monetary Shocks in Models with Inattentive Producers.

Fernando E Alvarez1, Francesco Lippi2, Luigi Paciello3

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Summary
This summary is machine-generated.

Firms that rationally pay to observe price information infrequently create volatile and long observation intervals. This leads to significant real effects from monetary policy shocks, even with realistic average observation times.

Keywords:
E5Impulse responsesInattentivenessMonetary shocksObservation costs

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Area of Science:

  • Economics
  • Monetary Policy
  • Behavioral Economics

Background:

  • Firms face costs to observe information affecting prices, leading to rational inattention.
  • Previous models of rational inattention used either long but constant, or short but volatile, observation intervals.
  • These models resulted in small real effects of monetary policy for realistic observation durations.

Purpose of the Study:

  • To investigate how non-negligible observation costs impact price setting behavior under rational inattention.
  • To explore whether these costs can generate both infrequent and volatile observation intervals.
  • To determine if such conditions lead to larger real effects of monetary policy.

Main Methods:

  • Economic modeling of producer observation costs and price setting behavior.
  • Analysis of the properties of observation intervals (duration and volatility).
  • Simulation or theoretical analysis of monetary policy transmission mechanisms.

Main Results:

  • Non-negligible observation costs naturally lead to observation intervals that are both infrequent and volatile.
  • These combined characteristics of observation intervals are crucial for generating substantial real effects.
  • The model demonstrates that monetary policy shocks can have significant real impacts under these conditions.

Conclusions:

  • Rational inattention, when incorporating non-negligible observation costs, provides a mechanism for significant monetary policy transmission.
  • The interplay of infrequent and volatile price observation is key to amplifying real effects.
  • This framework offers a more realistic explanation for the observed real effects of monetary policy.