Events

Ms. Yifan Zhang
PhD Candidate in Economics
University of Oxford

Survey data shows that households associate higher expected inflation with lower expected output growth, while firms and professionals associate higher expected inflation with higher expected growth. Standard macroeconomic models struggle to explain this heterogeneity. This paper shows that the asymmetry in agents’ beliefs can be explained by their respective optimal attention choices. Households find it optimal to pay more attention to supply shocks because these shocks most affect their real income, while firms optimally pay more attention to demand shocks because of their larger impact on profits. I develop a dynamic general equilibrium model with rationally inattentive households and firms and show that its predictions align with survey evidence. Attention choices influence the propagation of the shocks, affecting the slope of the Phillips curve. Furthermore, policies aimed to stimulate the economy by signaling future states or policy may be weakened as inattentive agents misinterpret such actions.