Working Paper

Investment under Rational Inattention: Evidence from US Sectoral Data

Peter Zorn
CESifo, Munich, 2020

CESifo Working Paper No. 8436

Macroeconomic and sector-specific shocks exert differential effects on investment in disaggregate sectoral data. The response to macroeconomic shocks is hump-shaped, just as in aggregate data. The effects of sectoral innovations decrease monotonically. A calibrated model of investment with convex capital adjustment costs and rational inattention explains these features of the data. The model matches the empirical responses of sectoral investment because learning about shocks generates additional investment demand over time, and more so after aggregate shocks with relatively higher persistence. The interaction of information frictions and physical adjustment costs is key to this result.

CESifo Category
Fiscal Policy, Macroeconomics and Growth
Monetary Policy and International Finance
Keywords: investment dynamics, hump shape, rational inattention, adjustment costs
JEL Classification: E220, E320, D250, D830, C380