SIGNAL EXTRACTION AND RATIONAL INATTENTION.
In this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear-quadratic-Gaussian (LQG) setting. We first show that if the variance of the noise and channel capa...
| Published in: | Economic Inquiry Vol. 52; no. 2; pp. 811 - 830 |
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| Main Authors: | , |
| Format: | Article |
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Wiley-Blackwell
Apr2014
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| Subjects: | |
| Online Access: | View this record in EBSCOhost |
| fields | @attributes: recordID: 1 pdfLink: plink: https://search.ebscohost.com/login.aspx?direct=true&db=ssf&AN=94631090&site=ehost-live header: @attributes: shortDbName: ssf uiTerm: 94631090 longDbName: Social Sciences Full Text (H.W. Wilson) uiTag: AN controlInfo: bkinfo: jinfo: jid: 00952583 EIQ jtl: Economic Inquiry issn: 00952583 maglogo: Y pubinfo: dt: Apr2014 vid: 52 iid: 2 pid: 480 pub: Wiley-Blackwell artinfo: ui: 94631090 10.1111/ecin.12073 ppf: 811 ppct: 19 formats: fmt: – @attributes: type: T – @attributes: type: P size: 664KB tig: atl: SIGNAL EXTRACTION AND RATIONAL INATTENTION. aug: au: LUO, YULEI YOUNG, ERIC R. affil: Luo: School of Economics and Finance, The University of Hong Kong, Hong Kong, Hong Kong. Phone 852 2859 1042, Fax 852 2548 1152. E ‐ mail Young: DepartmENt of Economics, University of Virginia, Charlottesville, VA 22904. Phone 434 924 3811, Fax 434 982 2904. E ‐ mail su: Economics Economic forecasting Economic models Income Prices Signal-to-noise ratio Information measurement sug: subj: Economics Economic forecasting Economic models Income Prices Signal-to-noise ratio Information measurement ab: In this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear-quadratic-Gaussian (LQG) setting. We first show that if the variance of the noise and channel capacity (or marginal information cost) is fixed exogenously in the SE and RI problems, respectively, the two environments lead to different policy and equilibrium asset pricing implications. Second, we find that if the signal-to-noise ratio and capacity in the SE and RI problems are fixed, respectively, the two theories generate the same policy implications in the univariate case, but different policy implications in the multivariate case. We also show that our results do not depend on the presence of correlation between fundamental and noise shocks. We then discuss the applications to macroeconomic models of permanent income and price-setting. ( JEL C61, D81, E21) pubtype: Academic Journal doctype: Article src: R language: English refInfo: copyright: @attributes: flag: N holdings: @attributes: islocal: N |
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