Rational Inattention and the Business Cycle Effects of Productivity and News Shocks

Bartosz Maćkowiak (1) , Mirko Wiederholt (2, 1, 3)

1 CEPR - Center for Economic Policy Research
2 ECON - Département d'économie (Sciences Po)
3 LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München

We solve a real business cycle model with rational inattention (an RI-RBC model). In the standard model, anticipated fluctuations in productivity fail to cause business cycle comovement. In response to news about higher future productivity, consumption rises but employment and investment fall. Introducing rational inattention helps produce comovement. Agents choose an optimal signal about the state of the economy. The optimal signal turns out to confound current with expected future productivity. Labor and investment demand rise after a news shock, causing an output expansion. Rational inattention also improves the propagation of a standard productivity shock, by inducing persistence.

Mots clés: Information choice; Rational inattention; Real business cycle model; News shocks; Productivity shocks

Domaines: Economies et finances

Bartosz Maćkowiak, Mirko Wiederholt. Rational Inattention and the Business Cycle Effects of Productivity and News Shocks. 2021. ⟨hal-03878704⟩