Martins, Guilherme and Sinigaglia, Daniel (2009): Real Business Cycle Dynamics under Rational Inattention.
Download (345kB) | Preview
This paper incorporates Rational Inattention as defined by Sims (2003a) to a traditional RBC model with multiple sources of uncertainty. Our model distinguishes between transitory and permanent labor and relative investment productivity shocks. The introduction of information frictions works as an endogenous adjustment cost: given the model parameters, the degree of sluggishness of endogenous variables in response to shocks is optimally determined. In practical terms, Rational Inattention increases the volatility and the contemporaneous correlations with output of consumption and decreases those of investment and hours. Moreover, it generates a trade-off between short-run and long-run shock variances. We believe these effects might have important welfare implications and can provide an analytical understanding on the links between business cycle fluctuations and the long-run performance of an economy.
|Item Type:||MPRA Paper|
|Original Title:||Real Business Cycle Dynamics under Rational Inattention|
|Keywords:||Real Business Cycle; Rational Inattention; Technology Diffusion|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
|Depositing User:||Daniel Sinigaglia|
|Date Deposited:||15. Mar 2009 15:54|
|Last Modified:||19. Feb 2013 19:06|
Adam, Klaus. (2008). "Monetary Policy and the Great Moderation. " Working Paper, European Central Bank, April 2008.
Benigno, Pierpaolo and Michael Woodford. (2006). "Optimal Taxation in an RBC Model: A Linear-Quadratic Approach." Journal of Economic Dynamics and Control, 30, 1445-1489.
Benigno, Pierpaolo and Michael Woodford. (2008). "Linear-Quadratic Approximation of Optimal Policy Problems." Working Paper, August 2008.
Boldrin, Michele; Lawrence J. Christiano and Jonas D. M. Fisher. (2001). "Habit Persistence, Asset Return, and the Business Cycle." American Economic Review, 91, 149-166.
Bursnside, Craig; Martin Eichenbaum and Sergio Rebelo. (1993). "Labor Hoarding and the Business-Cycle." Journal of Political Economy, 101(2), 245-273.
Fisher, Jonas D.M.. (2006). "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks". Journal of Political Economy, 114 (3), 413-452.
Galí, Jordi. (1999). "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?" American Economic Review, 89, 249-271.
Greenwood, Jeremy; Zvi Hercowitz and Per Krusell. (1998). "Long-Run Implications of Investment-Specific Technological Changes." American Economic Review, 87, 342-362.
Greenwood, Jeremy; Zvi Hercowitz and Per Krusell. (2000). "The role of investment-specific technological change in the business cycle." European Economic Review, 44, 91-115.
Hellwig, Christian and Laura Veldkamp. (2009). "Knowing What Others Know: Coordination Motives in Information Acquisition". Review of Economic Studies, 76, 223-251.
Justiniano, A.; Giorgio Primiceri and Andrea Tambalotti. (2008). "Investment Shocks and Business Cycle". Working Paper, July 2008.
King, Robert G. and Sergio T. Rebelo. (1999). "Resuscitating Real Business Cycles". Handbook of Macroeconomics, in: John. B. Taylor and Michael Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007, Elsevier.
Lucas, Robbert E.. (1987). "Models of Business Cycles." Basil Blackwell, Oxford UK.
Luo, Yulei. (2006). "Consumption Dynamics under Information Processing Constraint". Working Paper, University of Hong Kong, May 2006.
Luo, Yulei and Eric R. Young. (2008). "Rational Inattention and Aggregate Fluctuations." Working Paper, University of Hong Kong, November 2008.
Maćkowiak, Bartosz and Mirko Wiederholt. (2008). "Optimal Sticky Prices under Rational Inattention." American Economic Review, forthcoming.
Shannon, Claude. (1948). "A Mathematical Theory of Communication." The Bell System Technical Journal, 27, 623-656.
Sims, Christopher A.. (2003a). "Implications of Rational Inattention" Journal of Monetary Economics, 50(30), 665-690.
Sims, Christopher A.. (2003b). "Gaussianity of Optimal Noise in an LQ Model". Lecture Notes, Princeton University.
Sims, Christopher A.. (2005). "Rational Inattention: a Research Agenda." Technical Report, Princeton University.
Stock, James H. and Mark W. Watson. (1999)."Business Cycle Fluctuations in US Macroeconomic Time Series". Handbook of Macroeconomics, in: John. B. Taylor and Michael Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-63, Elsevier.
Woodford, Michael. (2001). "Imperfect Common Knowledge and the Effects of Monetary Policy". Working Paper, Princeton University, October 2001.