I thank the Editor Paul Evans and two anonimous referees, as well as Pierpaolo Benigno, Martin Eichenbaum, Christian Hellwig, Francesco Lippi, Giorgio Primiceri, Daniele Terlizzese, and Mirko Wiederholt for their comments.
Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention
Article first published online: 19 SEP 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 7, pages 1375–1399, October 2012
How to Cite
PACIELLO, L. (2012), Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention. Journal of Money, Credit and Banking, 44: 1375–1399. doi: 10.1111/j.1538-4616.2012.00536.x
- Issue published online: 19 SEP 2012
- Article first published online: 19 SEP 2012
- Received October 27, 2010; and accepted in revised form June 21, 2012.
- monetary policy
This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. Specifically, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by analytically showing how monetary policy feedback rules affect the incentives faced by firms in allocating attention. A policy rule responding more actively to inflation fluctuations induces firms to pay relatively more attention to more volatile shocks, helping to rationalize the observed behavior of prices in response to technology and monetary policy shocks.