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

When making production and pricing decisions, firm managers may not have the resources to track, interpret and respond to macroeconomic news. Despite the potential importance of such attention for firm performance, empirically assessing this importance has been challenging. This is because attention is neither easily observable nor quantifiable.

We construct a novel measure of firm attention to macroeconomic news based on their public annual filings with the US Securities and Exchange Commission. We then use this measure to determine the size of information costs in a model with rationally inattentive firms. We show that output response of inattentive firms is more sensitive to monetary policy than that of attentive firms.

The paper provides some of the first direct evidence of the importance of firm attention to the macroeconomy. We document that more firms pay attention to macroeconomic news during recessions even though most firms appear to always or never pay attention. When they do pay attention to a central bank’s moves during recessions, monetary stimulus has a smaller effect on output.