Associate Professor Zhang Renbin’s Research Paper Published in International Top Economics Journal Journal of Economic Theory
Recently, the research paper Nominal Rigidities, Rational Inattention, and the Optimal Monetary Policy by Associate Professor Zhang Renbin from the School of Economics at Shandong University was officially accepted by Journal of Economic Theory, an international top economics journal. The collaborators of the paper are Associate Professor Ou Shengliang from Shanghai Jiao Tong University, Assistant Researcher Yin Penghui from Central University of Finance and Economics, and Assistant Professor Zhang Donghai from the National University of Singapore.
This paper re-examines the design of optimal monetary policy in a multi-sector economy, focusing on the interaction mechanism between nominal rigidities and rational inattention, and how this interaction changes the traditional conclusion of central banks allocating inflation stabilization weights among different sectors. Previous studies based on complete information or exogenously given information frictions generally believe that higher weights should be given to sectors with more "sticky" prices. However, by introducing endogenous information acquisition choices, this paper shows that when the cost of acquiring macro information is high enough, the optimal policy should instead reduce the weight for sectors with stronger stickiness, thus overturning the traditional wisdom of "the greater the stickiness, the higher the weight".
The core mechanism of the paper is that nominal rigidities not only affect the frequency of price adjustment but also change enterprises' motivation to acquire information. Due to Calvo price stickiness, enterprises decide whether to acquire information after knowing whether they can adjust prices. When a sector has more flexible prices, enterprises that can adjust prices have a smaller price adjustment range in the face of shocks, reducing the marginal value of information, so they choose to "pay less attention" to macro conditions. On the contrary, in highly rigid sectors, enterprises that can adjust prices are more sensitive to economic conditions, so they invest more attention in acquiring information. This mechanism shows that endogenous information friction differences will arise among sectors with different nominal rigidities.
This endogenous asymmetry is reflected in social welfare as "dispersed-belief price dispersion". Due to the more dispersed estimates of macro conditions by different enterprises, sectors with greater information frictions will have more serious intra-sector misallocation, making the social cost of their price fluctuations higher. The decomposition results of the paper show that it is this new channel that makes optimal monetary policy possibly give higher weights to sectors with more flexible prices, and this conclusion only appears when the cost of information acquisition is large enough.
The paper also verifies the robustness of the mechanism in a dynamic model, and empirically confirms that industries with more flexible prices do show lower macro attention in reality through a large sample of empirical analysis of the frequency of Chinese macro keywords in 10-K reports. Overall, this paper emphasizes that in an environment with rational inattention, nominal rigidities affect optimal monetary policy by changing attention allocation, and its policy implications are fundamentally different from traditional literature.
Zhang Renbin is an associate professor at the School of Economics at Shandong University. He obtained his Ph.D. in Economics from Universitat Autònoma de Barcelona. His research directions are macroeconomics and macrofinance. Research achievements have been published in international top journals such as Journal of the European Economic Association, Journal of Monetary Economics, Journal of Economic Theory, and Economic Theory.
