From Micro Filters to the Macro Slope

Engin Kara

No 12638, CESifo Working Paper Series from CESifo

Abstract: Sticky-price firms do not merely underreact to ambiguous competitor prices — they actively lean against them. Above an inflation threshold, signals clear and firms reverse to follow. Existing information-friction models restrict weights between zero and one, ruling out this negative pass-through. I show it reflects signal extraction from a public sufficient statistic — the sectoral price index — which collapses the Townsend (1983) hierarchy of beliefs. The Phillips curve separates: the expectations channel is state-dependent, the cost channel is not. Six million UK price observations confirm this asymmetry, delivering a state-dependent Phillips curve with an inflation dependent slope.

Keywords: higher-order beliefs; public signals; Phillips curve; price setting; information frictions; common knowledge (search for similar items in EconPapers)
JEL-codes: D82 D83 E31 E52 (search for similar items in EconPapers)
Date: 2026
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