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Article: Signal Extraction and Rational Inattention

TitleSignal Extraction and Rational Inattention
Authors
Issue Date2014
PublisherJohn Wiley & Sons, Inc.. The Journal's web site is located at http://www.wiley.com/bw/journal.asp?ref=0095-2583
Citation
Economic Inquiry , 2014, v. 52, p. 811-829 How to Cite?
AbstractIn this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear-quadratic-Gaussian (LQG) setting. We first show that if the variance of the noise and channel capacity (or marginal information cost) are fixed exogenously in the SE and RI problems, respectively, the two environments lead to di¤erent policy and equilibrium asset pricing implications. Second, we find that if the signal-to-noise ratio and capacity in the SE and RI problems are fixed, respectively, the two theories generate the same policy implications in the univariate case, but different policy implications in the multivariate case. We also show that our results do not depend on the presence of correlation between fundamental and noise shocks. We then discuss the applications to macroeconomic models of permanent income and price-setting.
Persistent Identifierhttp://hdl.handle.net/10722/201020
SSRN
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorLuo, Yen_US
dc.contributor.authorYoung, Een_US
dc.date.accessioned2014-08-21T07:09:56Z-
dc.date.available2014-08-21T07:09:56Z-
dc.date.issued2014en_US
dc.identifier.citationEconomic Inquiry , 2014, v. 52, p. 811-829en_US
dc.identifier.urihttp://hdl.handle.net/10722/201020-
dc.description.abstractIn this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear-quadratic-Gaussian (LQG) setting. We first show that if the variance of the noise and channel capacity (or marginal information cost) are fixed exogenously in the SE and RI problems, respectively, the two environments lead to di¤erent policy and equilibrium asset pricing implications. Second, we find that if the signal-to-noise ratio and capacity in the SE and RI problems are fixed, respectively, the two theories generate the same policy implications in the univariate case, but different policy implications in the multivariate case. We also show that our results do not depend on the presence of correlation between fundamental and noise shocks. We then discuss the applications to macroeconomic models of permanent income and price-setting.en_US
dc.languageengen_US
dc.publisherJohn Wiley & Sons, Inc.. The Journal's web site is located at http://www.wiley.com/bw/journal.asp?ref=0095-2583en_US
dc.relation.ispartofEconomic Inquiryen_US
dc.rightsEconomic Inquiry . Copyright © John Wiley & Sons, Inc..en_US
dc.rightsSpecial Statement for Preprint only Before publication: 'This is a preprint of an article accepted for publication in [The Journal of Pathology] Copyright © ([year]) ([Pathological Society of Great Britain and Ireland])'. After publication: the preprint notice should be amended to follows: 'This is a preprint of an article published in [include the complete citation information for the final version of the Contribution as published in the print edition of the Journal]' For Cochrane Library/ Cochrane Database of Systematic Reviews, add statement & acknowledgement : ‘This review is published as a Cochrane Review in the Cochrane Database of Systematic Reviews 20XX, Issue X. Cochrane Reviews are regularly updated as new evidence emerges and in response to comments and criticisms, and the Cochrane Database of Systematic Reviews should be consulted for the most recent version of the Review.’ Please include reference to the Review and hyperlink to the original version using the following format e.g. Authors. Title of Review. Cochrane Database of Systematic Reviews 20XX, Issue #. Art. No.: CD00XXXX. DOI: 10.1002/14651858.CD00XXXX (insert persistent link to the article by using the URL: http://dx.doi.org/10.1002/14651858.CD00XXXX) (This statement should refer to the most recent issue of the Cochrane Database of Systematic Reviews in which the Review published.)en_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleSignal Extraction and Rational Inattentionen_US
dc.typeArticleen_US
dc.identifier.emailLuo, Y: yluo@econ.hku.hken_US
dc.identifier.authorityLuo, Y=rp01083en_US
dc.description.naturepreprint-
dc.identifier.doi10.1111/ecin.12073-
dc.identifier.hkuros235186en_US
dc.identifier.volume52en_US
dc.identifier.spage811en_US
dc.identifier.epage829en_US
dc.identifier.isiWOS:000331795900020-
dc.publisher.placeHoboken, NJ 07030 U.S.A.en_US
dc.identifier.ssrn2401415-

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