Dynamic Rational Inattention and the Phillips Curve

36 Pages Posted: 17 Oct 2019

See all articles by Hassan Afrouzi

Hassan Afrouzi

Columbia University

Choongryul Yang

Board of Governors of the Federal Reserve System

Date Written: October 7, 2019

Abstract

We develop a tractable and portable method for characterizing the solution to dynamic multivariate rational inattention models in linear quadratic Gaussian settings. We apply our framework to propose an attention driven theory of the Phillips curve, the slope of which is endogenous to how monetary policy is conducted. We show that the Phillips curve is flatter when the monetary policy is more hawkish: rationally inattentive firms find it optimal to ignore monetary policy shocks when the monetary authority commits to stabilize nominal variables. Moreover, we show that an unexpectedly more dovish monetary policy leads to a completely flat Phillips curve in the short-run and a steeper Phillips curve in the long-run.

Keywords: Rational Inattention, Dynamic Information Acquisition, Phillips Curve

JEL Classification: D83, D84, E03, E58

Suggested Citation

Afrouzi, Hassan and Yang, Choongryul, Dynamic Rational Inattention and the Phillips Curve (October 7, 2019). Available at SSRN: https://ssrn.com/abstract=3465793 or http://dx.doi.org/10.2139/ssrn.3465793

Hassan Afrouzi (Contact Author)

Columbia University ( email )

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New York, NY 10027
United States

HOME PAGE: http://www.afrouzi.com

Choongryul Yang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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