Attention and a Paradox of Uncertainty

Chiang, Yu-Ting

doi:10.20955/wp.2022.004

Working Paper Revision

Attention and a Paradox of Uncertainty

Abstract: I show that macroeconomic uncertainty during recessions can arise from people paying more attention to aggregate events. When information is dispersed, people's attempts to acquire more information can lead to higher aggregate volatility, forecast dispersion, and uncertainty about aggregate output. Information rigidity is reduced, consistent with evidence in forecast surveys, and distinct from the prediction of exogenous volatility shocks. When the model is calibrated to U.S. data, endogenous attention accounts for half of the observed fluctuations in volatility, forecast dispersion, and uncertainty. I also provide a method to solve models with varying attention and uncertainty under an infinite regress problem due to dispersed information.

JEL Classification: D8; E1; E3; E7;

https://doi.org/10.20955/wp.2022.004