Inflation—Who Cares? Monetary Policy in Times of Low Attention

Abstract

AbstractI propose an approach to quantify attention to inflation and show that attention declined after the Great Inflation period. This decline in attention has important implications for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation‐attention traps: prolonged periods of a binding lower bound and low inflation due to slowly adjusting inflation expectations. As attention declines, the optimal policy response is to increase the inflation target. The lower bound fundamentally changes the normative implications of declining attention: lower attention raises welfare absent the lower‐bound constraint, whereas it decreases welfare when accounting for the lower bound.