Why don’t people pay attention? Endogenous Sticky Information in a DSGE Model

Building on the models of sticky information, we endogenize the prob-ability of obtaining new information by introducing a switching mech-anism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are re-tained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to in-flation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule