Elasticity of Attention and Optimal Monetary Policy

Luo, Shaowen; Tsang, Kwok Ping

doi:10.2139/ssrn.3623412

Elasticity of Attention and Optimal Monetary Policy

9 Pages Posted: 2 Jul 2020

See all articles by Shaowen Luo

Shaowen Luo

Virginia Polytechnic Institute & State University - Department of Economics

Kwok Ping Tsang

Virginia Polytechnic Institute & State University

Date Written: June 9, 2020

Abstract

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

Suggested Citation: Suggested Citation

Luo, Shaowen and Tsang, Kwok Ping, Elasticity of Attention and Optimal Monetary Policy (June 9, 2020). Available at SSRN: https://ssrn.com/abstract=3623412 or http://dx.doi.org/10.2139/ssrn.3623412