Abstract: Recently empirical research has emphasized that theoretical models of price-setting must distinguish between the effects of aggregate and sector-level shocks, and moreover that they must support heterogeneous behavior across sectors. This paper develops a model that can deliver these features by extending the rational inattention price-setting approach pioneered by Mackowiak and Wiederholt ´ (2009) to a multisector setting. Our analytic solution to a special case of the rational inattention problem allows us to detail attention allocation mechanisms and explore implications. More generally, we find that the multisector setting preserves the desirable characteristic that firms respond differently to different types of shocks, allows for heterogeneous responses, and reduces the need for extreme calibration of key parameters.

Full paper can be found here.