Inattentiveness and the Investment Channel of Monetary Policy

Abstract

How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data that suggests that the answer to this question likely plays an important role in understanding macroeconomic dynamics. In a simple model, I show that financially constrained firms will generally choose to be more attentive to economic conditions, consistent with my empirical evidence. Embedding this mechanism into a DSGE model, I show that the aggregate response of investment to a monetary policy shock hinges on this interaction. The model also predicts that credit-constrained firms ultimately reduce their investment after an expansionary shock, a prediction that I confirm empirically.

Abolfazl Rezghi

Economist (EP)

My research interests include monetary policy, financial frictions, firm dynamics, and behavioral macroeconomics.