Does Inattentiveness Matter for DSGE Modelling? An Empirical Investigation

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.


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