Consumer Imperfect Information and Endogenous Price Rigidity

Jean-Paul L'Huillier

American Economic Journal: Macroeconomics, 2020, vol. 12, issue 2, 94-123

Abstract: This paper studies the propagation of monetary shocks in an economy featuring a strategic microfoundation for price rigidities. Following an aggregate shock to money, most consumers are initially uninformed. The market for goods is decentralized. Firms are better off delaying the adjustment of prices until enough consumers learn. At the same time, consumers learn from firms that have adjusted prices. The implied endogenous information diffusion follows a Bernoulli differential equation, implying a nonlinear path of learning. Nonlinear learning implies hump-shaped dynamics of output and inflation. A quantitative exercise suggests that these dynamics can be sizable and persistent.

JEL-codes: D11 D21 D40 D82 E23 E31 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:12:y:2020:i:2:p:94-123

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DOI: 10.1257/mac.20170203

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