Firm Inattention and the Transmission of Monetary Policy: A Text-Based Approach

This paper provides direct evidence of the importance of firm attention to macroeconomic dynamics. We construct a text-based measure of firm attention to macroeconomic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise stock returns of attentive firms more than those of inattentive firms, and contractionary shocks lower returns of attentive firms by less. We interpret the findings using a quantitative model of rationally inattentive firms and calibrate parameters for information frictions using our text-based measure. In the model, firms invest in attention endogenously and face heterogeneous information costs. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.