IMF Working Papers

Inattentiveness and the Investment Channel of Monetary Policy

By Abolfazl Rezghi

January 24, 2025

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Format: Chicago

Abolfazl Rezghi. "Inattentiveness and the Investment Channel of Monetary Policy", IMF Working Papers 2025, 025 (2025), accessed April 30, 2025, https://doi.org/10.5089/9798400298028.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

How does rational inattention interact with financial frictions? I provide new empirical evidence from survey data suggesting that this interaction likely plays a critical role in understanding macroeconomic dynamics. In a simple model, I demonstrate that financially constrained firms tend to be more attentive to economic conditions, consistent with my empirical findings. Embedding this mechanism into a DSGE model, I show that the aggregate investment response to a monetary policy shock depends on this interaction. The model further predicts that credit-constrained firms reduce their investment after an expansionary shock due to tighter borrowing constraints and higher production costs, a prediction I empirically confirm.

Subject: Econometric analysis, Economic theory, Financial frictions, General equilibrium models, Inflation, Labor, Monetary expansion, Monetary policy, Prices, Unemployment rate

Keywords: Aggregate investment response, Australia and New Zealand, Financial frictions, Firm age, General equilibrium models, Inflation, Investment, Investment channel, Investment data, Monetary expansion, Monetary policy, Monetary policy shock, Rational inattention, Unemployment rate

Publication Details

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