Elasticity of Attention and Optimal Monetary Policy
9 Pages Posted: 2 Jul 2020
Date Written: June 9, 2020
Optimal monetary policy depends crucially on whether agents have exogenous, endogenous-inelastic, or endogenous-elastic attention. We show in this paper that, under elastic attention, optimal monetary policy may induce equilibria that are not possible under the other two settings: decision makers choose not to pay any attention to any shocks that generates inefficient economic fluctuations, and welfare loss is at the minimum.
Keywords: rational inattention, elasticity of attention, optimal monetary policy
JEL Classification: E3, E5, D8
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