Rational Inattention to News: The Perils of Forward Guidance

39 Pages Posted: 9 Jan 2013

Date Written: January 2013

Abstract

This paper studies the social value of information about the future when agents are rationally inattentive. In a stylized OLG model of inflation the central bank (CB) can set money supply in response to the current price. The CB has perfect foresight about the future T shocks and releases this information to rationally inattentive agents. At the unique REE, individual and aggregate risks can increase with the release when the monetary conduct is not 'tight enough' and agents are 'not attentive enough' to the news. In particular, the shorter the T, the more attentive the agents must be to avoid perverse welfare effects, whereas the notion of 'tight enough' remains invariant. In this sense, efficient communication requires effective monetary policy.

Keywords: information acquisition, Central Bank communication, monetary policy, social value of information

JEL Classification: E50, E58, E60, D83

Suggested Citation

Gaballo, Gaetano, Rational Inattention to News: The Perils of Forward Guidance (January 2013). Banque de France Working Paper No. 416. Available at SSRN: https://ssrn.com/abstract=2197711 or http://dx.doi.org/10.2139/ssrn.2197711

Gaetano Gaballo (Contact Author)

Banque de France ( email )

Paris
France

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