Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Hassan Afrouzi

Journal of Political Economy, 2024, vol. 132, issue 10, 3378 - 3420

Abstract: This paper studies how competition affects firms’ expectations in a new dynamic general equilibrium model with rational inattention and oligopolistic competition where firms acquire information about their competitors’ beliefs. In the model, firms with fewer competitors are less attentive to aggregate variables—a novel prediction supported by survey evidence. A calibrated version of the model matches the relationship between firms’ numbers of competitors and their uncertainty about aggregate inflation as a nontargeted moment. A quantitative exercise reveals that firms’ strategic inattention to aggregates significantly amplifies monetary nonneutrality and shifts output response disproportionately toward less competitive oligopolies by distorting relative prices.

Date: 2024
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Related works:
Working Paper: Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money (2023)
Working Paper: Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/730201

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