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  4. January 2016
  5. Rational Inattention to News: The Perils of Forward Guidance

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Rational Inattention to News: The Perils of Forward Guidance

  • Gaetano Gaballo
American Economic Journal: Macroeconomics
vol. 8, no. 1, January 2016
(pp. 42–97)
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Abstract

This paper studies the social value of information about the future. In a stylized OLG model, agents need to forecast the future price level, they observe the current price and perceive with idiosyncratic noise the expectation announced by a more informed authority. When forward guidance communication is loose, the market becomes a main source of information about the future. Reliance on market information amplifies the impact of shocks on prices, which increases ex ante uncertainty and worsens agents' forecasting ability, harming social welfare. However, an appropriate policy can convert the perils of the announcement in opportunities. (JEL D83, E13, E52, E62, H63)

Citation

Gaballo, Gaetano. 2016. "Rational Inattention to News: The Perils of Forward Guidance." American Economic Journal: Macroeconomics, 8 (1): 42–97. DOI: 10.1257/mac.20130337

Additional Materials

JEL Classification

  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • E13 General Aggregative Models: Neoclassical
  • E52 Monetary Policy
  • E62 Fiscal Policy
  • H63 National Debt; Debt Management; Sovereign Debt
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