Discrete Actions in Information-Constrained Tracking Problems

CERGE-EI Working Paper Series No. 441

23 Pages Posted: 16 Jul 2011 Last revised: 21 Jul 2011

See all articles by Filip Matějka

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Christopher A. Sims

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1, 2011

Abstract

Optimal actions of an agent facing a Shannon capacity constraint on the translation of an uncertain signal into an action can easily turn out to be discretely distributed, even when the objective function and the initial distribution of uncertainty contain no discrete elements. We show this result analytically in a broad class of cases. It has implications for the interpretation of observed intervals between changes in prices or other economic choice variables in micro-data as indicators of costs of adjustment or of the degree of “stickiness” in responses to aggregate policy changes or business cycle fluctuations.

Keywords: rational inattention, adjustment frictions, sticky prices

JEL Classification: D81, D83, E52

Suggested Citation

Matějka, Filip and Sims, Christopher A., Discrete Actions in Information-Constrained Tracking Problems (June 1, 2011). CERGE-EI Working Paper Series No. 441, Available at SSRN: https://ssrn.com/abstract=1886640 or http://dx.doi.org/10.2139/ssrn.1886640

Filip Matějka (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Christopher A. Sims

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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