Essays in Macroeconomics and Information Theory

This dissertation studies macroeconomics and information theory. Each essay investigates the effects of imperfect information processing on macroeconomics, international finance, and social welfare, even when the information is transmitted accurately but not processed perfectly by the recipients.

In Chapter 2, I explore the underlying reasons for the rapid spread of financial contagion across markets with weak correlations using a dynamic model of rational inattention. In my model, agents invest in two assets, whose returns are uncorrelated. Monitoring the returns on these assets entails costly information acquisition. Unlike in past work, I allow for the total amount of information that the investor acquires to endogenously respond to the change in volatility of assets' returns. By emphasizing the decomposition of attention rather than the relative signal weights of the two assets in the optimal signal, I find that increased volatility of one asset's returns heightens not only investor attention to that asset (as past research has found), but also to attention to other assets as well (counter to the conclusions of existing research), as a result of the increased subjective correlation. I validate these predictions using the text from the Financial Times during the 1997 Asian Financial Crisis. Furthermore, the theoretical results provide general mechanisms of volatility spillover in the canonical rational inattention model and the pivotal role of information structure choice in these processes.

In Chapter 3, I examine the relationship between news media credibility, information friction, and strategic complementarity, especially during uncertain times like the COVID-19 pandemic. It introduces a news media verification mechanism to the Beauty Contest model and discusses the effects of an endogenous information cost model on the reliability perception of public information and social welfare. The study highlights how increased information costs and high strategic complementarity might reduce efforts to verify public information, potentially leading to undervalued news media credibility and increased belief polarization. It suggests that, contradicting the insights of Morris and Shin (2002), improving news media trustworthiness or accuracy of public information could almost always enhance social welfare, urging the need for empirical research to further understand the news media's impact on economic outcomes and policy-making.