Attention and Fluctuations in Macroeconomic Uncertainty

Chiang, Yu-Ting

doi:10.20955/wp.2022.004

Working Paper

Attention and Fluctuations in Macroeconomic Uncertainty

Abstract: 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.

Keywords: business cycles; macroeconomic uncertainty; dispersed information; rational inattention;

JEL Classification: D8; E1; E3; E7;

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