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Warwick Monash Economics Student Papers

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The Warwick Monash Economics Student Papers (WM-ESP) gather the best Undergraduate and Masters dissertations by Economics students from the University of Warwick and Monash University. This bi-annual paper series showcases research undertaken by our students on a varied range of topics. Papers range in length from 5,000 to 8,000 words depending on whether the student is an undergraduate or postgraduate, and the university they attend. The papers included in the series are carefully selected based on their quality and originality. WM-ESP aims to disseminate research in Economics as well as acknowledge the students for their exemplary work, contributing to the research environment in both departments.

WM-ESP Editorial Board

  • Sascha O. Becker (Monash University and University of Warwick)
  • Mark Crosby (Monash University)
  • Atisha Ghosh (University of Warwick)
  • James Fenske (University of Warwick)
  • Cecilia T. Lanata-Briones (University of Warwick)
  • Thomas Martin (University of Warwick)
  • Vinod Mishra (Monash University)
  • Choon Wang (Monash University)
  • Natalia Zinovyeva (University of Warwick)

53 - Application method of rational inattention hypothesis, and Rational Inattention New Keynesian Philips Curve creation

Shun Tonami

This paper gives a fresh perspective on the New Keynesian Philips Curve (NKPC) when combining the rational inattention hypothesis, which will give a new insight into backward-looking evidence. A further contribution of this paper is to give a unique application method of the development of the rational inattention hypothesis in other economic fields. This study provides the viewpoint that OLS (ordinary least squares) estimators have an imperfect information bias under the noise information model where economic agents optimize their behaviors through the rational inattention hypothesis. Specifically, the information flow constraint is redefined as the regression coefficient constraint by information theory extension. As a result, if the rational inattention hypothesis is expected to hold in economic fields, the Ridge regression can provide optimal estimations for economists in their fields by allowing them to consider the imperfect information bias through penalizing the coefficients. In empirical work, the rational inattention model complements the NKPC by including the imperfect information bias error in the regression analysis. The estimation reveals that the imperfect information bias error can play a backward-looking role. The rational inattention NKPC introduces the backward-looking element theoretically and demonstrates inflation inertia well.