Inattention and the impact of monetary policy

Zidong An, Salem Abo‐Zaid and Xuguang Simon Sheng

Journal of Applied Econometrics, 2023, vol. 38, issue 4, 623-643

Abstract: We measure aggregate inattention as the common component in agents' inattentiveness to many economic variables. Applying this measure to the US Survey of Professional Forecasters enables us to establish the following empirical evidence. Professional forecasters update their information sets every 5 months on average but do so more frequently in response to high inflation and unemployment, as well as rising market volatility and policy uncertainty. Monetary policy shocks have larger real effects when the degree of inattention is higher. To explain our empirical findings, we propose a general equilibrium model with state‐dependent information rigidity in both the production and household sectors.

Date: 2023
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