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Information-constrained state-dependent pricing

Michael Woodford ()

Journal of Monetary Economics, 2009, vol. 56, issue S, S100-S124

Abstract: A model is presented in which decisions about when to review a firm's existing price must be made on the basis of imprecise awareness of current market conditions. Imperfect information is endogenized using a variant of the theory of “rational inattention” proposed by Sims [1998. Stickiness. Carnegie-Rochester Conference Series on Public Policy 49, 317–356; 2003. Implications of rational inattention. Journal of Monetary Economics 50, 665–690; 2006. Rational inattention: a research agenda. Unpublished, Princeton University]. The resulting class of models includes the standard (full-information) “Ss” model as a limiting case, but statistics on individual price changes from micro data sets are better fit by a parameterization with substantial information costs. This can reconcile substantial real effects of nominal disturbances with evidence on the frequency of price changes.

Keywords: Rational inattention; Generalized Ss model; Adjustment hazard; Calvo model (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1016/j.jmoneco.2009.06.014

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