Attention and Fluctuations in Macroeconomic Uncertainty

By Yu-Ting Chiang

This paper studies a dispersed information economy in which agents can exert costly attention to learn about an unknown aggregate state of the economy. Under certain conditions, attention and four measures of uncertainty are countercyclical: Agents pay more attention when they expect the economy to be in a bad state, and their reaction generates higher (i) aggregate output volatility, (ii) cross-sectional output dispersion, (iii) forecast dispersion about aggregate output, and (iv) subjective uncertainty about aggregate output faced by each agent. All these phenomena are prominent features of the U.S. data. When attention cost is calibrated to forecast survey data, the model generates countercyclical fluctuations in attention and uncertainty, consistent with untargeted moments from the data. Fluctuations in attention and uncertainty are higher-order properties of the model. A new method is developed to solve higher-order dynamics of the equilibrium under an infinite regress problem.

The study of how attentive people are to economic news is incredibly important, as it lies at the heart of expectation formation. Ironically, understanding the simple rules people may use is outrageously difficult. To be frank, I have a real hard time figuring out what is going on in this paper, as for other papers in this literature. I also do not know how this could be applied in the simpler fashion to the standard models. I hope someone works on that. It is really important.

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