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Rational Inattention, Multi-Product Firms and the Neutrality of Money

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  • Ernesto Pastén

Abstract

I augment the rational inattention model of price-setting (in which firms have a limited capacity to process information) to allow firms to produce multiple goods. My main contribution is to highlight the economies of scale in the use of information that arise in this context, which firms exploit by acquiring information of aggregate variables: Aggregate information is useful for pricing all goods; idiosyncratic information is only useful for pricing goods it is concerned with. The model quantitatively predicts average price changes consistent with the data for the U.S., low costs for firms due to the friction, and comovement of prices inside firms. Importantly, the economies of scale in the use of information cut by four the capacity of the model to deliver money non-neutrality when firms produce two goods instead of one. Money becomes almost neutral when firms produce five goods or more.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 664.

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Date of creation: Feb 2012
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Handle: RePEc:chb:bcchwp:664

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  2. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers 05-4, Bank of Canada.
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  8. Lin Peng & Wei Xiong, 2005. "Investor Attention: Overconfidence and Category Learning," NBER Working Papers 11400, National Bureau of Economic Research, Inc.
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  12. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  13. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
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  16. Yulei Luo & Jun Nie & Eric R. Young, 2010. "Robustness, information-processing constraints, and the current account in small open economies," Research Working Paper, Federal Reserve Bank of Kansas City RWP 10-17, Federal Reserve Bank of Kansas City.
  17. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 356-388.
  18. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-96, December.
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Cited by:
  1. Alvarez, Fernando E & Lippi, Francesco, 2012. "Price setting with menu cost for multi-product firms," CEPR Discussion Papers 8863, C.E.P.R. Discussion Papers.
  2. Luo, Yulei & Young, Eric, 2013. "Rational Inattention in Macroeconomics: A Survey," MPRA Paper 54267, University Library of Munich, Germany.

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