Dispersed information, nominal rigidities and monetary business cycles: a hayekian perspective

Christian Hellwig () and Venky Venkateswaran ()
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Christian Hellwig: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Venky Venkateswaran: Stern School of Business - NYU - New York University [New York] - NYU - NYU System

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Abstract: We study the propagation of nominal shocks in a dispersed information economy where firms learn from and respond to information generated by their activities in product and factor markets. We prove the existence of a "Hayekian benchmark", defined by conditions under which imperfect information has no effect on equilibrium outcomes. This occurs under fairly general conditions when prices are flexible, i.e. without nominal frictions, informational frictions are irrelevant. With sticky prices, however, this irrelevance obtains only if there are no strategic complementarities in pricing and aggregate and idiosyncratic shocks are equally persistent. With complementarities and/or differences in persistence, the interaction of nominal and informational frictions slows down price adjustment, amplifying real effects from nominal shocks (relative to a full information model with only nominal frictions). In a calibrated model, the amplification is most pronounced over the medium to long term. In the short run, market generated information leads to substantial aggregate price adjustment, even though firms may be completely unaware of changes in aggregate conditions.

Keywords: Real effects of nominal shocks; Price setting; Incomplete information (search for similar items in EconPapers)
Date: 2025-02-17
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