Uncertainty and Information Acquisition

The paper presented in this ZEW Research Seminar leverages the small open economy Switzerland as a testing ground for basic premises of models of rational inattention. First, the authors document high levels of information acquisition about the exchange rate compared to the inflation and unemployment rate in samples of both firms and consumers. Second, they provide descriptive evidence that information frictions strongly decline in the stake size of economic decisions involved for firms and consumers, as predicted by models of rational inattention. Third, they show that consistent with a basic premise of rational inattention models, firms' demand for a report about exchange rate developments increases in an exogenously induced increase in the perceived uncertainty of the exchange rate. Households’ information acquisition, however, is inelastic to an exogenous increase in perceived exchange rate uncertainty.