Rational Inattention in Macroeconomics: A Survey

In this paper we survey recent works on rational inattention (RI) in macroeconomics within the dynamic linear-quadratic-Gaussian (LQG) setting. We first discuss how RI affects consumption smoothness and sensitivity, precautionary savings, asset pricing, portfolio choice, and aggregate fluctuations in the univariate case. We then discuss the applications of RI to macroeconomic models of permanent income and price-setting in the multivariate case. Finally, we briefly discuss how RI can be applied to non-LQG settings.