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Imperfect common knowledge and the information value of prices

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  • Jeffery Amato

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  • Hyun Shin

    ()

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    Abstract

    When economic agents have diverse private information on the fundamentals of the economy, prices may serve as a poor aggregator of this private information. We examine the information value of prices in a monopolistic competition setting that has become standard in the New Keynesian macroeconomics literature. We show that public information has a disproportionate effect on agents’ decisions, crowds out private information, and thereby has the potential to degrade the information value of prices. This effect is strongest in an economy with keen price competition. Monetary policy must rely on less informative signals of the underlying cost conditions. Copyright Springer-Verlag Berlin/Heidelberg 2006

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    File URL: http://hdl.handle.net/10.1007/s00199-004-0587-0
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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 27 (2006)
    Issue (Month): 1 (01)
    Pages: 213-241

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    Handle: RePEc:spr:joecth:v:27:y:2006:i:1:p:213-241

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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Related research

    Keywords: Differential information; Price inertia; Common knowledge.;

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    Cited by:
    1. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003 263, Society for Computational Economics.
    2. George-Marios Angeletos & Jennifer La'O, 2009. "Incomplete Information, Higher-Order Beliefs and Price Inertia," NBER Working Papers 15003, National Bureau of Economic Research, Inc.
    3. Camille Cornand & Frank Heinemann, 2008. "Optimal Degree of Public Information Dissemination," Economic Journal, Royal Economic Society, vol. 118(528), pages 718-742, 04.
    4. Frappa, S. & Mésonnier, J-S., 2009. "The housing price boom of the late ’90s: did inflation targeting matter?," Working papers 255, Banque de France.
    5. Ricardo Reis, 2009. "A Sticky-Information General-Equilibrium Model for Policy Analysis," NBER Working Papers 14732, National Bureau of Economic Research, Inc.
    6. Gabriel Desgranges & Céline Rochon, 2013. "Conformism and public news," Economic Theory, Springer, vol. 52(3), pages 1061-1090, April.
    7. Frappa, Sébastien & Mésonnier, Jean-Stéphane, 2010. "The housing price boom of the late 1990s: Did inflation targeting matter?," Journal of Financial Stability, Elsevier, vol. 6(4), pages 243-254, December.
    8. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
    9. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    10. Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.

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