Exogenous Information, Endogenous Information and Optimal Monetary Policy
Einaudi Institute for Economics and Finance; Northwestern University
New Keynesian model with rational inattention where price setters in firms choose how much attention to allocate to aggregate conditions (aggregate technology and desired markup), replacing Calvo price stickiness with information frictions base
Dixit-Stiglitz differentiated products, firms set prices with limited attention to aggregate conditions, production function with decreasing returns to labor
Proposition 3, Proposition 5, Proposition 6
Optimal monetary policy under endogenous information structure - complete price stabilization is optimal in response to both technology shocks and markup shocks
Main result of the paper: when decision-makers in firms choose attention allocation, complete price stabilization (zero inflation) is optimal for all shock types