This paper develops a dynamic stochastic general equilibrium (DSGE) model with rational
inattention. Households and decision-makers in firms have limited attention, and decide how to
allocate their attention. The paper studies the implications of rational inattention for business
cycle dynamics. The model can match empirical findings that are difficult to match with other
DSGE models. Moreover, due to the endogeneity of the allocation of attention, the outcomes
of policy experiments conducted with this model (e.g., the effects of changing parameters of
the monetary policy rule) differ markedly from the outcomes of the same policy experiments
conducted with other DSGE models.