Business Cycle Dynamics under Rational Inattention

Maćkowiak, Bartosz; Wiederholt, Mirko

doi:10.1093/restud/rdv027

Cited by 223 publications

(129 citation statements)

References 70 publications

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“…This, firstly, reinforces the insight of Maćkowiak and Wiederholt (2015) that a single informational friction can replace the multitude of frictions typically used in DSGE models to generate empirically plausible responses to productivity and monetary shocks. Second, going beyond the results established by Maćkowiak and Wiederholt, our result also demonstrates that one does not even need any fundamental source of business cycle fluctuations.…”

Section: Introductionsupporting

confidence: 66%

“…While the literature is mostly theoretical, there are now a few studies with a quantitative focus. In particular, Angeletos, Collard and Dellas (2015) and Huo and Takayama (2015a) explore a version of Angeletos and La'O (2013) ;Blanchard, L'Huillier and Lorenzoni (2013) estimate a simplified version of Lorenzoni (2009);Melosi (2014Melosi ( , 2016 estimates a variant of Woodford (2003);and Maćkowiak and Wiederholt (2015) calibrate a particular DSGE model with rational inattention. A notable difference with respect to these papers is the flexibility of expectation dynamics considered in this paper.…”

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confidence: 99%

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Information-Driven Business Cycles: A Primal Approach

Chahrour,

Ulbricht

2017

SSRN Journal

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We develop a methodology to characterize equilibrium in DSGE models, free of parametric restrictions on information. First, we define a "primal" economy in which deviations from full information are captured by wedges in agents' expectations. Then, we provide conditions ensuring some information-structure can implement these wedges.We apply the approach to estimate a business cycle model where firms and households have dispersed information. The estimated model fits the data, attributing the majority of fluctuations to a single shock to households' expectations. The responses are consistent with an implementation in which households become optimistic about local productivities and gradually learn about others' optimism.

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Section: Introductionsupporting

confidence: 66%

mentioning

confidence: 99%

Information-Driven Business Cycles: A Primal Approach

Chahrour,

Ulbricht

2017

SSRN Journal

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“…Entropy-based constraints are used by Mondria (2010), Sims (2003), or Maćkowiak andWiederholt (2009, 2015). For an n-dimensional normal variable η ∼ N(f K −1 ), entropy is a simple function of the determinant of variance-covariance matrix: n exp(−2κ).…”

Section: S4 Entropy-based Information Constraintmentioning

confidence: 99%

A Rational Theory of Mutual Funds' Attention Allocation

2016

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The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high‐valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios' covariance with payoff shocks, cross‐fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.

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“…Luo (2008) shows that RI and HF deliver identical aggregate consumption growth movements, but at the individual level RI models deliver more consumption volatility due to the noise shocks (which are canceled out by aggregation). 41 In this section, we compare the different implications of HF and RI in the general equilibrium framework. Following Alessie and Lusardi (1997), we introduce HF into the FI-RE model specified in Section 2.1 by assuming that the utility function takes the following form:…”

Section: Comparison With Habit Formationmentioning

confidence: 99%

Rational inattention and the dynamics of consumption and wealth in general equilibrium

Luo

Nie

Wang

et al. 2017

Journal of Economic Theory

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We use a recursive utility version of a basic Huggett (1993) model to study the cross-sectional dispersion of consumption and wealth (relative to income). The basic model implies too little dispersion compared to the data, whereas a one-parameter extension to include rational inattention (limited information processing) delivers a better fit to both facts in general equilibrium.In particular, intertemporal substitution plays an important role in determining the two key dispersion moments via affecting the degree of optimal attention in equilibrium. Alternative models that rely on habit formation, incomplete information about current income, or borrowing constraints are not consistent with the facts we document.

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Business Cycle Dynamics under Rational Inattention

Abstract: 4Non-technical summary 5

Cited by 223 publications

References 70 publications

Information-Driven Business Cycles: A Primal Approach

Information-Driven Business Cycles: A Primal Approach

A Rational Theory of Mutual Funds' Attention Allocation

Rational inattention and the dynamics of consumption and wealth in general equilibrium

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