Inflation Inattention on the Production Network: Firm-Level Evidence and Macro Implications

Rafael Gonçalves and Ina Hajdini

No 26-23, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Relying on a micro-level dataset of US firms' inflation expectations, we document that firms in industries with larger Domar weights and more flexible prices have more accurate inflation forecasts. To explain these patterns, we develop a rational inattention model of price-setting firms within a production network. In equilibrium, firms' inflation forecast accuracy depends on their attention to marginal costs, the comovement between their marginal cost and aggregate inflation, and the change in the marginal cost. When calibrated to US input-output data, the model replicates the cross-sectoral relationship between forecast accuracy, Domar weights, and price flexibility. Quantitatively, we find that production networks endogenously increase nominal rigidity. This channel accounts for about 30 percent of the networks' attenuation of the inflation response to monetary shocks, deepening the standard flattening of the Phillips curve from input-output linkages.

Keywords: inflation expectations; rational inattention; production networks; inflation dynamics; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E32 E71 (search for similar items in EconPapers)
Date: 2026-09-21
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:103851

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DOI: 10.26509/frbc-wp-202623

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