Disinflations with sticky information

This dissertation consists of three essays in which I examine the macroeconomic implications of the delayed acquisition and processing of information on the part of private agents. I also investigate how the private agents' information acquisition decision can influence monetary policy trade-offs to explain the Great Moderation: the apparent decline in the volatility of inflation, output, and other macroeconomic aggregates after 1983.; In my first chapter, "Optimal Monetary Policy with Disparate Expectations and Endogenous Inattention", I study optimal monetary policy in a world where rationally inattentive agents have disparate expectations about the current and future state of the economy. Each individual's observation of the true state of the economy is polluted by idiosyncratic noise, leading to disparate expectations. This noise can be reduced, but only by incurring a cost. In an environment of monopolistic competition with time varying markups, the monetary authority varies the money supply to trade off price instability for output stability. I solve for the representative household welfare maximizing monetary policy response to markup shocks given that agents choose the precision of the information they acquire depending on this policy. When agents have less precise information, the trade-off between price instability and output stability grows more favorable. However, when the monetary authority tries to exploit this trade-off through more active policy, it induces private agents to acquire more information. I show that a reduction in markup shock volatility leads the central bank to moderate their response to shocks, simultaneously lowering the volatility of prices and output by leading agents to expend less effort in acquiring information. This result shows that theoretically, the Great Moderation could have been the result of good luck (less volatility of exogenous shocks) enabling good policy (a greater commitment to price stability).; The second chapter "Imperfectly Credible Disinflations with Sticky Information" I study the effects of a disinflationary policy when price setting behavior is characterized by a Sticky Information Phillips Curve, as derived by Mankiw and Reis. Contrary to the results obtained with a standard Phillips Curve derived from sticky prices, a disinflation leads to large recession, even in the absence of credibility problems. When the central bank's credibility becomes an issue, the length and depth of a disinflationary recession becomes greater. I study the optimal speed of disinflation and find that under the Sticky Information Phillips Curve, short rapid disinflations are less costly in terms of the welfare of a representative consumer than a gradualist approach. Finally, when credibility is endogenous more aggressive and rapid disinflations are more likely to be successful.; In the third chapter,"Disinflations with Imperfect Common Knowledge about Changing Inflation Targets" I study how an economy with rationally inattentive agents responds to a shift in monetary policy from a high inflation to low inflation regime and how this response depends upon the nominal anchor. Specifically I compare disinflations engineered through price level targeting to disinflations engineered through inflation targeting. Under price level targeting the monetary authority commits to a particular path for prices, while under inflation targeting the monetary authority only responds to the rate of change in the price level. Due to costs of information acquiring and processing economic agents are rationally inattentive and only gather imprecise information, modeled as a noisy signal. Rationally inattentive agents are able to track more easily the state of the economy under a price level targeting regime lowering the marginal benefit of information relative to the marginal benefit under inflation targeting. When agents face a cost of acquiring and processing information, they will chose to acquire less informatio...