Information Rigidity and Economic Uncertainty: A New Theory and Stylized Facts

I propose a structural micro-founded sticky-noisy information model with high- and low-uncertainty regimes. Agents first appraise the state of uncertainty and only spend resources to update their inflation expectations if they perceive uncertainty as sufficiently high. Time-varying uncertainty affects expectation formation through two direct channels: 1) the "wake-up call" effect, which causes agents to pay more attention, increasing their quantity of information; and 2) the "wait-and-see" effect, which decreases their quality of information and prompts them to put less weight on new noisier information. Using structural estimation of alternative models with information frictions, I find that accounting for the indirect state-dependence channel, the proposed innovation of the model, better explains the observed information rigidity, since it considers the interaction between the two direct effects. A substantial amount of information rigidity is due to inattention, leaving ample room for policymakers to employ frequent, direct, and simple forward guidance to "pierce the veil" of inattention.%%%%Economics%%%%attention, inflation expectations, information rigidity, state-dependence, survey forecasts, uncertainty%%%%Economics%%%%Degree Awarded: Ph.D. Economics. American University