Adaptive Learning, Endogenous Inattention, and Changes in Monetary Policy

Abstract

This paper develops an adaptive learning formulation of an extension to the Ball, Mankiw, and Reis (2005) sticky information model that incorporates endogenous inattention. We show that, following an exogenous increase in the policymaker's preferences for price vs. output stability, the learning process can converge to a new equilibrium in which both output and price volatility are lower.

Keywords: expectations, optimal monetary policy, bounded rationality, economic stability, adaptive learning

JEL Classification: E52, E31, D83, D84