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 2
Optimal monetary policy under exogenous information structure in response to technology shocks - complete price stabilization is optimal