Does inattentiveness matter for DSGE modeling? An empirical investigation

Abstract

The purpose of this paper is to investigate the empirical performance of the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model in its usual form with full-information rational expectations and compare it with versions assuming inattentiveness- namely sticky information and imperfect information data revision. Using a Bayesian estimation approach on US quarterly data (both real-time and survey) from 1969 to 2015, we find that the model with sticky information fits best and is the only one that can generate the delayed responses observed in the data. The imperfect information data revision model is improved fits better when survey data is used in place of real-time data, suggesting that it contains extra information. • The paper considers the full-information rational expectations with two other forms of inattentive expectations, namely sticky information and imperfect information data revision. • The paper extends empirical evidence using both real-time and survey data to verify which model with the inattentive feature best replicates actual outcomes. • This is the first empirical analysis to compare models with and without expectations inattentiveness. • The New Keynesian DSGE model with an inattentive feature is a better fit with the real-time data using Bayesian estimation. • The imperfect information data revision model performs better when we substitute the real-time data with the survey data.