Working Paper

Rationally inattentive macroeconomic wedges

Abstract: This paper argues that the solution to a dynamic optimization problem of consumption and labor under finite information-processing capacity can simultaneously explain the intertemporal and intratemporal labor wedges. It presents a partial equilibrium model, where a representative risk adverse consumer chooses information about wealth with limited attention. The paper compares ex-post realizations of models with finite and infinite capacity. The model produces macroeconomic wedges and measures of elasticity consistent with the literature. These findings suggest that a consumption-labor model with information-processing constraints can explain the difference between predicted and observed consumption and employment behavior.

Keywords: Consumption (Economics); Labor market; Econometric models; Consumer behavior;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2010

Number: 1005

Note: Published as: Tutino, Antonella (2011), "Rationally Inattentive Macroeconomic Wedges," Journal of Economic Dynamics and Control 35 (3): 344-362.