We use a statistical model to estimate impulse responses of sectoral price indices to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The Calvo...

Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability...

Survey data on expectations shows that households have heterogeneous inflation expectations and their inflation expectations respond sluggishly to realized shocks to future inflation. By contrast, in models with a zero bound on the nominal interest rate currently used for monetary and fiscal...

This paper derives an analytical solution to a class of rational inattention problems. In Sims (2003) Section 4, the decision-maker chooses the process {Y} to track a Gaussian process {X} with loss E[(X-Y)^2] subject to a constraint on the information flow between the two processes. Sims (2003)...

Should the central bank care whether slow adjustment of the price level is due to imperfect information as in Woodford (2002) or due to adjustment costs as in the standard New Keynesian model? To answer this question, we study optimal monetary policy in a model that is an extension of Woodford...

Micro data on inflation expectations has two important properties: (i) there is substantial heterogeneity in inflation expectations across households, and (ii) the average inflation expectation responds slowly to shocks to actual inflation. This paper studies the effect of dispersed inflation...

Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability...

This paper studies a dynamic stochastic general equilibrium model with rational inattention. Decisionmakers have limited attention and choose the optimal allocation of their attention. We study the implications of rational inattention for business cycle dynamics. For example, we study how...