Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention

This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and in‡ation are much more responsive to aggregate technology shocks than to monetary policy shocks. Speci…cally, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces …rms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by analytically showing how monetary policy feedback rules a¤ect the incentives faced by …rms in allocating attention. A policy rule responding more actively to in‡ation ‡uctuations induces …rms to pay relatively more attention to more volatile shocks, helping to rationalize the observed behavior of prices in response to technology and monetary policy shocks. JEL Codes: E31, E4, C11, C3