sticky prices and monetary policy evidence from disaggregated us data this paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor augmented vector autoregression estimated on a large data set on the basis of this estimation we establish eight facts 1 macroeconomic shocks explain only about 15 of sectoral inflation fluctuations 2 the persistence of sectoral inflation is driven by macroeconomic factors 3 while disaggregated prices respond quickly to sector specific shocks their responses to aggregate shocks are small on impact and larger thereafter 4 most prices respond with a significant delay to identified monetary policy shocks and show little evidence of a price puzzle contrary to existing studies based on traditional vars 5 categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least 6 the observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power 7 prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks 8 the sector specific components of prices and quantities move in opposite directions

information acquisition and under diversification if an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests which assets should he learn about the best assets to acquire information about are ones the investor expects to hold but the assets the investor holds depend on the information he observes we build a framework to solve jointly for investment and information choices with general preferences and information cost functions although the optimal research strategies depend on preferences and costs the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio information acquisition can rationalize investing in a diversified fund and a concentrated set of assets an allocation often observed but usually deemed anomalous copyright wiley blackwell

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

rationally inattentive seller sales and discrete pricing prices tend to remain constant for a period of time and then jump in the literature this rigidity is usually interpreted to reflect a cost of adjusting prices this article shows that price rigidity can alternatively reflect optimal price setting when there are no adjustment costs namely if the seller is rationally inattentive the model generates non trivial pricing patterns that are consistent with the data and that are hard to explain with the traditional adjustment cost model in particular prices are adjusted frequently but move back and forth between a few given values hazard functions are downward sloping and responses to persistent shocks are sluggish these results are obtained in a model that implements rational inattention without simplifying assumptions on the functional forms of the processed signals

rational inattention dynamics inertia and delay in decision making we solve a general class of dynamic rational inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions the solution resembles the choice rule in a dynamic logit model but it is biased towards an optimal default rule that does not depend on the realized state we apply the general solution to the study of i the sunk cost fallacy ii inertia in actions leading to lagged adjustments to shocks and iii the tradeoff between accuracy and delay in decision making

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

does inflation adjust faster to aggregate technology shocks than to monetary policy shocks this paper studies u s inflation adjustment speed to aggregate technology shocks and to monetary policy shocks in a medium size bayesian vector autoregression model according to the model estimated on the 1959 2007 sample inflation adjusts much faster to aggregate technology shocks than to monetary policy shocks these results are robust to different identification assumptions and measures of aggregate prices however by separately estimating the model over the pre and post 1980 periods this paper further shows that inflation adjusts much faster to technology shocks than to monetary policy shocks in the post 1980 period but not in the pre 1980 period

discrete actions in information constrained decision problems individuals are constantly processing external information and translating it into actions this draws on limited resources of attention and requires economizing on attention devoted to signals related to economic behaviour a natural measure of such costs is based on shannon s channel capacity modelling economic agents as constrained by shannon capacity as they process freely available information turns out to imply that discretely distributed actions and thus actions that persist across repetitions of the same decision problem are very likely to emerge in settings that without information costs would imply continuously distributed behaviour we show how these results apply to the behaviour of an investor choosing portfolio allocations as well as to some mathematically simpler tracking problems that illustrate the mechanism trying to use costs of adjustment to explain stickiness of actions when interpreting the behaviour in our economic examples would lead to mistaken conclusions

a single judge solution to beauty contests we show that the equilibrium policy rule in beauty contest models is equivalent to that of a single agent s forecast of the economic fundamental this forecast is conditional on a modified information process which simply discounts the precision of idiosyncratic shocks by the degree of strategic complementarity the result holds for any linear gaussian signal process static or persistent stationary or nonstationary exogenous or endogenous and also extends to network games theoretically this result provides a sharp characterization of the equilibrium and its properties under dynamic information practically it provides a straightforward method to solve models with complicated information structures

knowing what others know coordination motives in information acquisition we explore how optimal information choices change the predictions of strategic models when a large number of agents play a game with strategic complementarity information choices exhibit complementarity as well if an agent wants to do what others do they want to know what others know this makes heterogeneous beliefs di cult to sustain and may generate multiple equilibria in models with substitutability agents prefer to difierentiate their information choices we use these theoretical results to examine the role of information choice in recent price setting models and to propose modeling techniques that ensure equilibrium uniqueness

international evidence on sticky consumption growth abstract this paper estimates the degree of stickiness in aggregate consumption growth sometimes interpreted as reflecting consumption habits for thirteen advanced economies we find that after controlling for measurement error consumption growth has a high degree of autocorrelation with a stickiness parameter of about 0 7 on average across countries the sticky consumption growth model outperforms the random walk model of hall 1978 and typically fits the data better than the popular mankiw 1989 model though in a few countries the sticky consumption growth and campbell mankiw models work about equally well

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

learning over the business cycle policy implications abstract this paper studies the policy implications of the endogeneity of information about the state of the economy the business cycle can be made less noisy and more efficient by incentivizing firms to vary their pricing and production decisions more with their beliefs about the state of the economy this calls for countercyclical taxes complemented by a monetary policy that leans against the wind the optimal policies trade off allocative efficiency for informational efficiency

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

costly information planning complementarities and the phillips curve sticky information models capture the sluggish response of aggregate prices to monetary shocks but fail to match the magnitude and frequency of price changes at the microlevel this paper shows that accounting for the endogenous decision of when to acquire new information about different shocks can help overcome this shortcoming in the calibrated model prices change frequently and by large amounts in response to idiosyncratic shocks but sluggishly to monetary shocks the paper also highlights that many predictions of the sticky information and rational inattention models are the same and thus robust to different specifications of information processing costs

information rigidity and the expectations formation process a simple framework and new facts we propose a new approach to test the full information rational expectations hypothesis which can identify whether rejections of the null arise from irrationality or limited information this approach quantifies the economic significance of departures from the null by quantifying the underlying degree of information rigidity applying this approach to u s and international data of professional forecasters and other agents yields pervasive evidence consistent with models of imperfect information furthermore the proposed approach sheds new light on policies such as inflation targeting and those leading to the great moderation affecting expectations finally we document evidence of state dependence in the expectations formation process

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

sticky information in general equilibrium this paper develops and analyzes a general equilibrium model with sticky information the only rigidity in goods labor and financial markets is that agents are inattentive sporadically updating their information sets when setting prices wages and consumption after presenting the ingredients of such a model the paper develops an algorithm to solve this class of models and uses it to study the model s dynamic properties it then estimates the parameters of the model using u s data on five key macroeconomic time series it finds that information stickiness is present in all markets and is especially pronounced for consumers and workers variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation output and hours jel e30 e10

sticky information and sticky prices abstract in the u s and europe prices change at least once a year yet nominal macro shocks seem to have real effects lasting well beyond a year sticky information models as posited by mankiw and reis 2002 sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 1295 1328 sims 2003 implications of rational inattention journal of monetary economics 50 3 665 690 and woodford 2003 princeton university press princeton nj can reconcile micro flexibility with macro rigidity we simulate a sticky information model in which price setters update information on macro shocks less frequently than information on micro shocks we then examine price changes in the micro data underlying the u s cpi empirical price changes react to old information just as sticky information models predict

monetary policy and price responsiveness to aggregate shocks under rational inattention this paper presents 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 the model of this paper builds on recent work by mackowiak and wiederholt 2009 who show that models of endogenous attention allocation deliver prices to be more responsive to more volatile shocks as everything else being equal firms pay relatively more attention to more volatile shocks in fact according to the u s data aggregate technology shocks are more volatile than monetary policy shocks inducing in this paper firms to pay more attention to the former than to the latter however most important this work adds to the literature by showing that the ability of the model of this paper to account for observed price dynamics crucially depends on monetary policy in particular this paper shows how interest rate feedback rules affect the incentives faced by firms in allocating attention a policy rate responding more actively to expected inflation and output fluctuations induces firms to pay relatively more attention to more volatile shocks this new mechanism of transmission of monetary policy helps rationalizing the observed behavior of prices in response to technology and monetary policy shocks and implies novel predictions about the impact of changes in taylor rules coefficients on economic fluctuations

the optimal portfolio problem with coherent risk measure constraints one of the basic problems of applied finance is the optimal selection of stocks with the aim of maximizing future returns and constraining risks by an appropriate measure here the problem is formulated by finding the portfolio that maximizes the expected return with risks constrained by the worst conditional expectation this model is a straightforward extension of the classic markovitz mean variance approach where the original risk measure variance is replaced by the worst conditional expectation the worst conditional expectation with a threshold a of a risk x in brief wcea x is a function that belongs to the class of coherent risk measures these are measures that satisfy a set of properties such as subadditivity and monotonicity that are introduced to prevent some of the drawbacks that affect some other common measures this paper shows that the optimal portfolio selection problem can be formulated as a linear programming instance but with an exponential number of constraints it can be solved efficiently by an appropriate generation constraint subroutine so that only a small number of inequalities are actually needed this method is applied to the optimal selection of stocks in the italian financial market and some computational results suggest that the optimal portfolios are better than the market index 2003 elsevier b v all rights reserved

long run consumption risk and asset allocation under recursive utility and rational inattention we study the portfolio decision of a household with limited information processing capacity rational inattention or ri in a setting with recursive utility we find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets even when the departure from standard expected utility with rational expectations is small in addition we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long run risk and thus require higher compensation in equilibrium our results are robust to the presence of correlation between the equity return and the ri induced noise and the presence of non tradable labor income

elastic attention risk sharing and international comovements in this paper we examine the effects of elastic information processing capacity or elastic attention proposed in sims 2010 on international consumption and income correlations in a tractable small open economy soe model with exogenous income processes we find that in the presence of capital mobility in financial markets elastic attention due to a fixed information processing cost lowers the international consumption correlations by generating heterogeneous consumption adjustments to income shocks across countries facing different macroeconomic uncertainty in addition we show that elastic attention can improve the model s predictions for the other key moments of the joint dynamics of consumption and income

an integrated stock bond portfolio optimization model abstract a new model for constructing an integrated stock bond portfolio is proposed this serves as an alternative to the popular asset allocation strategy in which the fund is first allocated to indexes corresponding to diverse asset classes and then allocated to individual assets using appropriate models for each asset class our model to the contrary determines the allocation of the fund to individual assets in one stage by solving a large scale mean variance or mean absolute deviation model using newly developed technologies in large scale linear programming and quadratic programming computational experiments show that the new approach can serve as a more reliable and less expensive method to allocate the fund to diverse classes of assets

double overreaction in beauty contests with information acquisition theory and experiment central banks disclosures such as forward guidance have a weaker effect on the economy in reality than in theoretical models the present paper contributes to understanding how people pay attention and react to various sources of information in a beauty contest with information acquisition we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention which in turn increases the weight assigned to them in equilibrium action a laboratory experiment provides evidence that the effect of strategic complementarities on the realised attention and the realised action is qualitatively consistent with theoretical predictions though quantitatively weaker both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realised reaction this suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves

monetary policy announcements and expectations evidence from german firms abstract we assess empirically whether monetary policy announcements impact firm expectations two features of our data set are key first we rely on a survey of production and price expectations of german firms that is expectations of actual price setters second we observe the day on which firms submit their answers to the survey we compare the responses of firms before and after monetary policy surprises and obtain two results first firm expectations respond to policy surprises second the response becomes weaker as the surprise becomes bigger a contractionary surprise of moderate size reduces firm expectations while a moderate expansionary surprise raises them large surprises both negative and positive fail to alter expectations consistent with this result we find that many of the ecb s announcements of non conventional policies did not affect expectations significantly overall our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise

monetary policy shocks what have we learned and to what end this paper reviews recent research that grapples with the question what happens after an exogenous shock to monetary policy we argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules the literature has not yet converged on a particular set of assumptions for identifying the effects of an exogenous shock to monetary policy nevertheless there is considerable agreement about the qualitative effects of a monetary policy shock in the sense that inference is robust across a large subset of the identification schemes that have been considered in the literature we document the nature of this agreement as it pertains to key economic aggregates

interest rate prominence in consumer decision making variations in consumers responsiveness to interest rates across households and over time have important implications for monetary transmission responses from the michigan survey of consumers provide an indication of the degree to which interest rates are a prominent consideration in spending decisions news recollection and financial situations prominence is strongest in housing attitudes increases with income education and homeownership and declined in the great recession rate prominence is associated with stronger responsiveness of consumption attitudes to monetary policy jel d84 d91 e21 e40 e50

portfolio choice attention allocation and price comovement abstract this paper models the attention allocation of portfolio investors investors choose the composition of their information subject to an information flow constraint given their expected investment strategy in the next period which is to hold a diversified portfolio in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal when investors use this private signal to update information about two assets changes in one asset affect both asset prices and may lead to asset price comovement the model also has implications for the transmission of volatility shocks between two assets

exogenous information endogenous information and optimal monetary policy most of the analysis of optimal monetary policy is conducted with the calvo model this paper studies optimal monetary policy when the slow adjustment of the price level is due to imperfect information by decision makers in firms we consider two models a model with exogenous dispersed information and a rational inattention model in the model with exogenous dispersed information complete stabilization of the price level is optimal after aggregate productivity shocks but not after markup shocks by contrast in the rational inattention model complete stabilization of the price level is optimal both after aggregate productivity shocks and after markup shocks moreover in the model with exogenous dispersed information there is no value from commitment to a future monetary policy by contrast in the rational inattention model there is value from commitment to a future monetary policy because then the private sector can trust the central bank that not paying attention to certain variables is optimal

optimal unemployment insurance with non separable preferences abstract in this paper we characterize the shape of optimal unemployment contracts when the preferences are non separable we show that the optimal contract generates an endogenous minimum replacement ratio

reset price inflation and the impact of monetary policy shocks abstract many business cycle models use a flat short run phillips curve due to time dependent pricing and strategic complementarities to explain fluctuations in real output but in doing so these models predict unrealistically high persistence and stability of us inflation in recent decades we calculate reset price inflation based on new prices chosen by the subsample of price changers to dissect this discrepancy we find that the models generate too much persistence and stability both in reset price inflation and in the way reset price inflation is converted into actual inflation our findings present a challenge to existing explanations for business cycles jel e31 e52

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

incomplete information higher order beliefs and price inertia the question that motivates this paper is how incomplete information impacts the response of prices to nominal shocks our baseline model is a variant of the calvo model in which firms observe the underlying nominal shocks with noise in this model the response of prices is pinned down by three parameters the precision of available information about the nominal shock the frequency of price adjustment and the degree of strategic complementarity in pricing decisions this result synthesizes the broader lessons of the pertinent literature however this synthesis provides only a partial view of the role of incomplete information once one allows for more general information structures than those used in previous work one cannot quantify the degree of price inertia without data on the dynamics of higher order beliefs or of the agents forecasts of inflation we highlight this with three extensions of our baseline model all of which break the tight connection between the precision of information and higher order beliefs featured in previous work

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

a basic new keynesian dsge model with dispersed information an agent based approach abstract the aim of this paper is to bridge macro agent based models with mainstream macroeconomic models by agentifying the baseline new keynesian dsge model the model features multiple boundedly rational optimizing agents and is analyzed through numerical simulations we exploit the flexibility of agent based modeling to explore the effect of dispersed information on the learning process and on macroeconomic outcomes we find that with dispersed information monetary and fiscal policy acquire the role of public signals

sectoral price data and models of price setting in the median sector 100 percent of the long run response of the sectoral price index to a sector specific shock occurs in the month of the shock the standard calvo model and the standard sticky information model can match this finding only under extreme assumptions concerning the profit maximizing price the rational inattention model of mackowiak and wiederholt 2009a optimal sticky prices under rational inattention american economic review 99 769 803 can match this finding without an extreme assumption concerning the profit maximizing price furthermore there is little variation across sectors in the speed of response of sectoral price indexes to sector specific shocks the rational inattention model matches this finding while the calvo model predicts too much cross sectional variation

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

time varying business volatility and the price setting of firms abstract does time varying business uncertainty volatility affect the price setting of firms and in what way we estimate from the micro data of the german ifo business climate survey the impact of idiosyncratic volatility on the extensive margin of firm level price setting behavior heightened uncertainty increases the probability of a price change suggesting that for price setting the volatility effect dominates the wait and see effect in a second step we use structural vector autoregressions to estimate the effects of uncertainty on the intensive pricing margin higher uncertainty leads to an increase in price dispersion and to larger price adjustments

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

information theoretic approaches in economics economics has seen a recent rise in interest in information theory as an alternative framework to the conventional notion of equilibrium as a fixed state such as walrasian market clearing general equilibrium the information theoretic approach is predicated on the notion of statistical equilibrium se that takes a distribution over all possible states as an equilibrium and therefore predicts the endogenous fluctuations of the system along with its central tendency simultaneously for this reason se approaches can explain the observed data without relying on arbitrary assumptions about random noise and provide useful insights for many interesting economic problems that conventional methods have not been able to satisfactorily deal with in this paper we review the key elements of information theory focusing on the notions and applications of entropy and se in economics particularly paying attention to how entropy concepts open up a new frontline of economic research

coarse pricing policies the muted volatility of inflation during the great recession and its aftermath has refocused attention on the constraints that firms face when adjusting prices using new empirical and theoretical results i argue that each firm s choice of how much information to acquire to set prices plays a central role in determining the patterns of pricing at the product level and the degree of aggregate price rigidity in response to shocks in support of the information channel i present product level evidence that firms price goods using coarse pricing policies that are updated infrequently and consist of a small menu of prices firms are heterogeneous in the complexity and duration of their pricing policies and this heterogeneity is reflected in differential responses to the great recession cycle with firms exhibiting more complex policies responding more aggressively i develop a theory of information constrained price setting that generates coarse pricing endogenously and quantitatively matches the discreteness duration and volatility of policies in the data the information friction dampens the responsiveness of prices to shocks and coupled with heightened volatility induces firms to keep prices relatively high to protect against losses in an uncertain environment

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

optimal unemployment insurance this paper considers the design of an optimal unemployment insurance system the problem is modeled as a repeated principalagent problem involving a risk averse agent the unemployed worker and a risk neutral principal which cannot monitor the agent s search effort the optimal long term contract subject to the associated incentive constraints is characterized this contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that under some mild regularity conditions increases with the lenght of the unemployment spell some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large the performance of this optimal contract is also compared to alternative liquidity provision mechanisms

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

setting the right prices for the wrong reasons we consider a model of nominal price adjustment with firm specific and aggregate shocks to economic fundamentals and incomplete dispersed information firms update their expectations about fundamentals based on their own cash flows revenues and wages we show that in a model with realistic levels of product level price dispersion the firms inference about aggregate shocks is very gradual yet in the aggregate prices adjust rapidly in response to aggregate nominal shocks when an aggregate shock occurs firms mistakenly attribute it to firm specific shocks but adjust prices nevertheless since the exact nature of the shock matters little for its optimal pricing decision

investor sophistication and capital income inequality abstract capital income inequality is large and growing fast accounting for a significant portion of total income inequality we study its growth in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness the model implies capital income inequality that grows with aggregate information technology investors differentially adjust both the size and the composition of their portfolios as unsophisticated investors retrench from trading risky securities and shift their portfolios to safer assets technological progress also reduces aggregate returns and increases the volume of transactions features that are consistent with recent u s data

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

unemployment insurance and unemployment spells this paper tests the effects of the level and length of unemployment insurance benefits on unemployment durations the paper particularly studies individual behavior during the weeks just prior to when benefits lapse higher unemployment insurance benefits are found to have a strong negative effect on the probability of leaving unemployment however the probability of leaving unemployment rises dramatically just prior to when benefits lapse individual data are used with accurate information of spell durations and the level and length of benefits the semiparametric estimation techniques used in the paper yield more plausible estimates than conventional approaches and provide useful diagnostics copyright 1990 by the econometric society

monetary non neutrality in a multisector menu cost model empirical evidence suggests that as much as one third of the u s business cycle is due to nominal shocks we calibrate a multisector menu cost model using new evidence on the cross sectional distribution of the frequency and size of price changes in the u s economy we augment the model to incorporate intermediate inputs we show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non neutrality generated by the model we furthermore show that the introduction of intermediate inputs raises the degree of monetary non neutrality by another factor of three without adversely affecting the model s ability to match the large average size of price changes a single sector model with a frequency of price change equal to the median rather than the mean generates monetary non neutrality similar to that in our multisector model our multisector model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23 of the u s business cycle

refining stylized facts from factor models of inflation summary factor models of disaggregate inflation indices suggest that sectoral shocks generate the bulk of sectoral inflation variance but no persistence aggregate shocks by contrast are the root of sectoral inflation persistence but have negligible relative variance we show that simple factor models do not cope well with essential features of price data in particular sectoral inflation series are subject to features such as measurement error sales and item substitutions in factor models these blow up the variance of sector specific shocks while reducing their persistence we control for such effects by estimating a refined factor model and find that inflation variance is driven by both aggregate and sectoral shocks sectoral shocks too generate substantial inflation persistence both findings contrast with earlier evidence from factor models but align well with recent micro evidence our results have implications for the foundations of price stickiness and provide quantitative inputs for calibrating models with sectoral heterogeneity copyright 2014 john wiley sons ltd

the social cost of near rational investment abstract we show that the stock market may fail to aggregate information even if it appears to be efficient and that the resulting decrease in the information content of prices may drastically red

the determinants of international investment and attention allocation using internet search query data abstract this paper explores the joint determination of home bias and attention allocation we overcome the typical challenge associated with evaluating attention allocation theories by using a new internet search query dataset to measure how much information investors decide to process employing an instrumental variables approach we find empirical evidence of a two way causality between home bias and attention our estimates suggest that if all countries were to receive the same level of attention as the u s then the average home bias by u s investors would fall from 85 2 to 57 3

household informedness and long run inflation expectations experimental evidence this article uses an experiment embedded in a survey to analyze the response of consumers long run inflation expectations to information about the federal reserve s inflation target and past inflation on average respondents revise forecasts toward the 2 target with either information treatment forecast uncertainty and heterogeneity decline with the treatments but remain substantial since the information in the treatments is publicly available these findings are consistent with models of imperfect information in which agents do not fully and continually update their information sets or incorporate all available information into their expectations response to treatments varies with prior informedness and with demographic characteristics

the sensitivity of tests of the intertemporal allocation of consumption to near rational alternatives suppose a consumer sets consumption equal to income each period rather than following the optimal permanent income decision rule how much utility does he lose this paper finds that the answer is typically less than 10 cents 1 per quarter in environments specified by popular tests on aggregate data it includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information it concludes that the theory does not make predictions for aggregate tests that are robust to small costs such as information or transactions copyright 1989 by american economic association

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting