Rotemberg and Imperfect Common Knowledge: A Solution Algorithm

Radek Šauer

No 8098, CESifo Working Paper Series from CESifo

Abstract: This paper develops an algorithm that enables to solve macroeconomic models with Rotemberg pricing and imperfect common knowledge. Under the concept of imperfect common knowledge, Rotemberg pricing requires the solution algorithm to take prices explicitly into account. The state space includes the hierarchy of average higher-order expectations as well as the aggregate price level. In addition to determining the usual policy functions of output, inflation, and the nominal interest rate, the algorithm has to search for the policy function of the aggregate price and for the policy function of the firm-specific price.

Keywords: Rotemberg pricing; dispersed information; heterogenous beliefs; Kalman filter; higher-order expectations (search for similar items in EconPapers)
JEL-codes: C63 D82 E31 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cmp, nep-knm and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8098

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