Firm Inattention and the Transmission of Monetary Policy: A Text-Based Approach

63 Pages Posted: 9 Aug 2021

See all articles by Wenting Song

Wenting Song

University of Michigan, Department of Economics

Samuel Stern

University of Michigan at Ann Arbor - Department of Economics, Students

Date Written: August 4, 2021

Abstract

This paper provides direct evidence of the importance of firm attention to macroeconomic dynamics. We construct a text-based measure of firm attention to macroeconomic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise stock returns of attentive firms more than those of inattentive firms, and contractionary shocks lower returns of attentive firms by less. We interpret the findings using a quantitative model of rationally inattentive firms and calibrate parameters for information frictions using our text-based measure. In the model, firms invest in attention endogenously and face heterogeneous information costs. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

Keywords: Rational inattention, monetary policy, natural language processing

JEL Classification: D83, E44, E52

Suggested Citation

Song, Wenting and Stern, Samuel, Firm Inattention and the Transmission of Monetary Policy: A Text-Based Approach (August 4, 2021). Available at SSRN: https://ssrn.com/abstract=3900641 or http://dx.doi.org/10.2139/ssrn.3900641

Wenting Song (Contact Author)

University of Michigan, Department of Economics ( email )

611 Tappan Ave
Ann Arbor, MI 48109
United States

Samuel Stern

University of Michigan at Ann Arbor - Department of Economics, Students ( email )

Ann Arbor, MI
United States

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