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Rotemberg and Imperfect Common Knowledge: A Solution Algorithm

Author

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  • Radek Šauer

Abstract

This paper develops an algorithm that enables to solve macroeconomic models with Rotemberg pricing and imperfect common knowledge. Under the concept of imperfect common knowledge, Rotemberg pricing requires the solution algorithm to take prices explicitly into account. The state space includes the hierarchy of average higher-order expectations as well as the aggregate price level. In addition to determining the usual policy functions of output, inflation, and the nominal interest rate, the algorithm has to search for the policy function of the aggregate price and for the policy function of the firm-specific price.

Suggested Citation

  • Radek Šauer, 2020. "Rotemberg and Imperfect Common Knowledge: A Solution Algorithm," CESifo Working Paper Series 8098, CESifo.
    • Handle: RePEc:ces:ceswps:_8098
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8098.pdf
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    More about this item

    Keywords

    Rotemberg pricing; dispersed information; heterogenous beliefs; Kalman filter; higher-order expectations;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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