Rational Inattention in Macroeconomics: A Survey

Luo, Yulei and Young, Eric (2013): Rational Inattention in Macroeconomics: A Survey.

Abstract

In this paper we survey recent works on rational inattention (RI) in macroeconomics within the dynamic linear-quadratic-Gaussian (LQG) setting. We first discuss how RI affects consumption smoothness and sensitivity, precautionary savings, asset pricing, portfolio choice, and aggregate fluctuations in the univariate case. We then discuss the applications of RI to macroeconomic models of permanent income and price-setting in the multivariate case. Finally, we briefly discuss how RI can be applied to non-LQG settings.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational Inattention, Consumption, Asset Pricing, Precautionary Savings, Portfolio Choice, Price Setting.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; F - International Economics > F3 - International Finance

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