Optimal Sticky Prices Under Rational Inattention
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Optimal Sticky Prices Under Rational Inattention
Maćkowiak, Bartosz | Wiederholt, Mirko
Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 4 : pp. 573–617
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Prof. Dr. Bartosz Maćkowiak, European Central Bank, Monetary Policy Research, Kaiserstrasse 29, D-60311 Frankfurt am Main
Prof. Dr. Mirko Wiederholt, Northwestern University, Department of Economics, 2001 Sheridan Road, Evanston, IL 60208, USA
References
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Boivin, J./Giannoni, M. P./Mihov, I. (2009): Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data, American Economic Review, 99(1): pp. 350–384.
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Gertler, M./Leahy, J. (2006): A Phillips Curve with an Ss Foundation, National Bureau of Economic Research Working Paper 11971.
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Hellwig, C./Veldkamp, L. (2009): Knowing What Others Know: Coordination Motives in Information Acquisition, Review of Economic studies, 76(1): pp. 223–251.
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Klenow, P. J./Kryvtsov, O. (2008): State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? Quarterly Journal of Economics, 123(3): pp. 863–904.
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Lucas, R. E., Jr. (1973): Some International Evidence on Output-Inflation Tradeoffs, American Eco- nomic Review, 63(3): pp. 326–334.
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Mankiw, N. G./Reis, R. (2002): Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve, Quarterly Journal of Economics, 117(4): pp. 1295–1328.
Google Scholar -
Midrigan, V. D. (2007): Menu Costs, Multi-Product Firms, and Aggregate Fluctuations, Center for Financial Studies Working Paper 2007/13.
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Morris, S./Shin, H. S. (2002): Social Value of Public Information, American Economic Review, 92(5): pp. 1521–1534.
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Pischke, J. S. (1995): Individual Income, Incomplete Information, and Aggregate Consumption, Econometrica, 63(4): pp. 805–840.
Google Scholar -
Reis, Ri. (2006): Inattentive Producers, Review of Economic studies, 73(3): pp. 793–821.
Google Scholar -
Sims, C. A. (1998): Stickiness. Carnegie-Rochester Conference series on Public Policy, 49: pp. 317–356.
Google Scholar -
Sims, C. A. (2003): Implications of Rational Inattention, Journal of Monetary Economics, 50(3): pp. 665–690.
Google Scholar -
Sims, C. A. (2006): Rational Inattention: Beyond the Linear-Quadratic Case, American Economic Review, 96(2): 158–163.
Google Scholar -
Smets, F./Wouters, R. (2003): “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association, 1(5): pp. 1123–1175.
Google Scholar -
Taylor, J. B. (1980): Aggregate Dynamics and Staggered Contracts.” Journal of Political Economy, 88(1): pp. 1–23.
Google Scholar -
Townsend, R. M. (1983): Forecasting the Forecasts of Others, Journal of Political Economy, 91(4): pp. 546–588.
Google Scholar -
Uhlig, H. (1996): A Law of Large Numbers for Large Economies, Economic Theory, 8(1): pp. 41–50.
Google Scholar -
Uhlig, H. (2005): What Are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure, Journal of Monetary Economics, 52(2), pp. 381–419.
Google Scholar -
Woodford, M. (2003a): Identification Procedure. Journal of Monetary Economics, 52(2): pp. 381–419, Imperfect Common Knowledge and the Effects of Monetary Policy.
Google Scholar -
Woodford, M. (2003b): Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.
Google Scholar -
Zbaracki, M. J./Ritson, M./Levy, D./Dutta, S./Bergen, M. (2004): Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets, Review of Economics and statistics, 86(2): pp. 514–533.
Google Scholar -
Aghion, P./Frydman, R./Stiglitz, J./Woodford, M.: Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund s. Phelps, Princeton University Press, ed., pp. 25–58.
Google Scholar -
Akerlof, G. A./Yellen, J. L. (1985): A Near-Rational Model of the Business Cycle, with Wage and Price Inertia, Quarterly Journal of Economics, 100(Supplement): pp. 823–838.
Google Scholar -
Angeletos, G.-M./Pavan, A. (2007): Efficient Use of Information and Social Value of Information, Econometrica, 75(4): pp. 1103–1142.
Google Scholar -
Ball, L./Romer, D. (1990): Real Rigidities and the Non-Neutrality of Money, Review of Economic studies, 57(2): pp. 183–203.
Google Scholar -
Bils M./Klenow, P. J. (2004): Some Evidence on the Importance of Sticky Prices, Journal of Political Economy, 112(5): pp. 947–985.
Google Scholar -
Boivin, J./Giannoni, M. P./Mihov, I. (2009): Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data, American Economic Review, 99(1): pp. 350–384.
Google Scholar -
Boivin, J./Giannoni, M. P./Mihov, I. (1999): Monetary Policy Shocks: What Have We Learned and to What End? In Handbook of Macroeconomics. Vol. 1A, ed. John B. Taylor and Michael Woodford, pp. 65–148. Amsterdam: North-Holland.
Google Scholar -
Christiano, L. J./Eichenbaum, M./Evans, C. L. (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1): pp. 1–45.
Google Scholar -
Cover, T. M./Thomas, J. A. (1991): Elements of Information Theory. New York: John Wiley and Sons.
Google Scholar -
Gabaix, X./Laibson, D. I. (2000): A Boundedly Rational Decision Algorithm, American Economic Review, 90(2): pp. 433–438.
Google Scholar -
Gertler, M./Leahy, J. (2006): A Phillips Curve with an Ss Foundation, National Bureau of Economic Research Working Paper 11971.
Google Scholar -
Goldberg, P. K. (1995): Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry, Econometrica, 63(4): pp. 891–951.
Google Scholar -
Golosov, M./Lucas, R. E., Jr. (2007): Menu Costs and Phillips Curves, Journal of Political Economy, 115(2): pp. 171–199.
Google Scholar -
Hellwig, C./Veldkamp, L. (2009): Knowing What Others Know: Coordination Motives in Information Acquisition, Review of Economic studies, 76(1): pp. 223–251.
Google Scholar -
Klenow, P. J./Kryvtsov, O. (2008): State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? Quarterly Journal of Economics, 123(3): pp. 863–904.
Google Scholar -
Leeper, E. M./Sims, C. A./Zha, T. (1996): What Does Monetary Policy Do? Brookings Papers on Economic Activity, 1996(2): pp. 1–63.
Google Scholar -
Lucas, R. E. Jr. (1972): Expectations and the Neutrality of Money, Journal of Economic Theory, 4(2): pp. 103–124.
Google Scholar -
Lucas, R. E., Jr. (1973): Some International Evidence on Output-Inflation Tradeoffs, American Eco- nomic Review, 63(3): pp. 326–334.
Google Scholar -
Lucas, R. E., Jr. (1977): Understanding Business Cycles, Carnegie-Rochester Conference series on Public Policy, 5: pp. 7–29.
Google Scholar -
Mackowiak, B. A./Wiederholt, M. (2007): Optimal Sticky Prices under Rational Inattention, Centre for Economic Policy Research Discussion Paper 6243.
Google Scholar -
Mankiw, N. G./Reis, R. (2002): Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve, Quarterly Journal of Economics, 117(4): pp. 1295–1328.
Google Scholar -
Midrigan, V. D. (2007): Menu Costs, Multi-Product Firms, and Aggregate Fluctuations, Center for Financial Studies Working Paper 2007/13.
Google Scholar -
Morris, S./Shin, H. S. (2002): Social Value of Public Information, American Economic Review, 92(5): pp. 1521–1534.
Google Scholar -
Morris, S./Shin, H.-S. (2003): Global Games: Theory and Applications, Advances in Economics and Econometrics, ed. Mathias Dewatripont, Lars Peter Hansen, and Steven J. Turnovsky, 56–114. Cambridge: Cambridge University Press.
Google Scholar -
Nakamura, E./Steinsson, J. (2008a): Facts about Prices: A Reevaluation of Menu Cost Models, Quarterly Journal of Economics, 123(4): pp. 1415–1464.
Google Scholar -
Nakamura, E./Steinsson, J. (2008b): Monetary Non-Neutrality in a Multi-Sector Menu Cost Model, National Bureau of Economic Research Working Paper 14001.
Google Scholar -
Phelps, E. S. (1970): Introduction: The New Microeconomics in Employment and Inflation Theory. In Microeconomic Foundations of Employment and Inflation Theory, by Edmund S. Phelps, pp. 1–23. New York: Norton.
Google Scholar -
Pischke, J. S. (1995): Individual Income, Incomplete Information, and Aggregate Consumption, Econometrica, 63(4): pp. 805–840.
Google Scholar -
Reis, Ri. (2006): Inattentive Producers, Review of Economic studies, 73(3): pp. 793–821.
Google Scholar -
Sims, C. A. (1998): Stickiness. Carnegie-Rochester Conference series on Public Policy, 49: pp. 317–356.
Google Scholar -
Sims, C. A. (2003): Implications of Rational Inattention, Journal of Monetary Economics, 50(3): pp. 665–690.
Google Scholar -
Sims, C. A. (2006): Rational Inattention: Beyond the Linear-Quadratic Case, American Economic Review, 96(2): 158–163.
Google Scholar -
Smets, F./Wouters, R. (2003): “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association, 1(5): pp. 1123–1175.
Google Scholar -
Taylor, J. B. (1980): Aggregate Dynamics and Staggered Contracts.” Journal of Political Economy, 88(1): pp. 1–23.
Google Scholar -
Townsend, R. M. (1983): Forecasting the Forecasts of Others, Journal of Political Economy, 91(4): pp. 546–588.
Google Scholar -
Uhlig, H. (1996): A Law of Large Numbers for Large Economies, Economic Theory, 8(1): pp. 41–50.
Google Scholar -
Uhlig, H. (2005): What Are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure, Journal of Monetary Economics, 52(2), pp. 381–419.
Google Scholar -
Woodford, M. (2003a): Identification Procedure. Journal of Monetary Economics, 52(2): pp. 381–419, Imperfect Common Knowledge and the Effects of Monetary Policy.
Google Scholar -
Woodford, M. (2003b): Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.
Google Scholar -
Zbaracki, M. J./Ritson, M./Levy, D./Dutta, S./Bergen, M. (2004): Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets, Review of Economics and statistics, 86(2): pp. 514–533.
Google Scholar
Abstract
This paper presents a model in which price setting firms decide what to pay attention to, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in micro data, prices react fast and by large amounts to idiosyncratic shocks, but only slowly and by small amounts to nominal shocks. Nominal shocks have strong and persistent real effects.
An optimizing trader will process those prices of most importance to his decision problem most frequently and carefully, those of less importance less so, and most prices not at all. Of the many sources of risk of importance to him, the business cycle and aggregate behavior generally is, for most agents, of no special importance, and there is no reason for traders to specialize their own information systems for diagnosing general movements correctly.
– Robert E. Lucas (1977, 21)