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Multi-layered rational inattention and time-varying volatility

Hobler, Stephan (2022) Multi-layered rational inattention and time-varying volatility. Journal of Economic Dynamics and Control, 138. ISSN 0165-1889

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Identification Number: 10.1016/j.jedc.2022.104372

Abstract

Standard rational inattention models suppose that agents process noisy signals about otherwise fully revealing data. I show that introducing imperfect data quality yields new insights in settings in which volatility is time-varying. I impose a two-layered signal structure in which agents learn imperfectly about noisy sources. Treating data as only partially revealing of the true fundamental amplifies impulse responses to a second moment shock and, if data quality is sufficiently poor, can change the qualitative direction of the response. I apply my findings to the price-setting problem of firms and find that higher data quality enhances the transmission of monetary policy and reduces macroeconomic volatility. I also show how the empirically documented procyclicality of data quality has non-trivial implications for the Phillips curve.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-e...
Additional Information: © 2022 The Author(s).
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Date Deposited: 21 Apr 2022 16:03
Last Modified: 27 May 2022 13:21
URI: http://eprints.lse.ac.uk/id/eprint/114913

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