Does Inattentiveness Matter for DSGE Modelling? An Empirical Investigation

January 12, 2022

By Jenyu Chou, Joshy Easaw and Patrick Minford

The purpose of this paper is to investigate the empirical performance of the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model in its usual form with full-information rational expectations and compare it with versions assuming inattentiveness- namely sticky information and imperfect information data revision. Using a Bayesian estimation approach on US quarterly data (both realtime and survey) from 1969 to 2015, we find that the model with sticky information fits best and is the only one that can generate the delayed responses observed in the data. The imperfect information data revision model is improved fits better when survey data is used in place of real-time data, suggesting that it contains extra information.

This looks like a very interesting question. Given all the attention to news shocks and their proven relevance, it must matter how people digest information. However, we you think about inattention, one is inattentive to small things and attentive to large ones. This must imply that the relationship is highly non-linear. But it looks like the model is linear. Thus, I not not know what to make of the results, all the more that there is Calvo-pricing, which basically implies lack of attention.


Financial Constraints, Sectoral Heterogeneity, and the Cyclicality of Investment

January 4, 2022

By Cooper Howes

While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of U.S. manufacturing firms, I show this increase is driven by the types of firms that are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back.

I must confess I was not aware of this fact that manufacturing investment is countercyclical. This paper demonstrates also a nice automatic stabilizer from that sector. I wonder, though, whether the size of manufacturing matters in this regard, as a larger sector would not be able to take as easily advantage of lower capital costs.