Hassan Afrouzi - Columbia University

Dynamic Rational Inattention and the Phillips Curve (joint w/Choongryul Yang)

Abstract:  We develop a tractable method to characterize the full transitions dynamics, as well as the steady state, of dynamic multivariate rational inattention models in linear quadratic Gaussian settings. As an application, we develop a general equilibrium flexible price model that leads to a Phillips curve due to its rational inattention micro-foundations. This Phillips curve has several novel properties. Its slope is endogenous to systematics aspects of monetary policy and is flatter when the monetary policy is more hawkish: rationally inattentive firms find it optimal to ignore monetary policy shocks when the monetary authority commits to stabilize nominal variables. Moreover, an unexpectedly more dovish monetary policy leads to a completely flat Phillips curve in the short-run and a steeper Phillips curve in the long-run.