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Costly Information, Planning Complementarity and the New Keynesian Phillips Curve

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  • Acharya, Sushant

Abstract

I show that in a setting with costly information processing, strategic complementarity in pricing, by generating planning complementatrities, results in the aggregate price responding slowly to nominal shocks even though individual firm prices change by large amounts in response to idiosyncratic shocks. Klenow and Kryvtsov (2008) conclude that none of the commonly used pricing models is capable of matching all the facts from micro data and at the same time generate a large and persistent response to monetary policy. Unlike the standard state dependent pricing models which rely on physical costs of changing prices to generate unresponsiveness of prices, I instead focus on costs of planning and processing information, a channel which researchers have found empirically more important than physical costs of changing prices in determining pricing decisions of firms. The model is able to match all the features of micro pricing data and at the same time generates a sluggish response of aggregate price to monetary policy, thus predicting a short run Phillips curve. Also, the model generates firms behavior in which they set price plans rather than prices and also shows that firms may choose to index prices to long run inflation optimally as is often assumed in New-Keynesian models. The paper highlights the fact that to explain non-neutrality in the short run, prices need not be sticky, it is just that they do not contain all the information in the short run but become informationally efficient in the long run resulting in a long run neutrality result.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22514.

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Date of creation: 14 Apr 2010
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Handle: RePEc:pra:mprapa:22514

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Keywords: Planning Complementarity; Price Rigidity; Costly Information Acquisition; Real effects of Nominal Shocks; Forecasting; Strategic Complementarity;

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References

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  1. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics, EconWPA 0402020, EconWPA.
  2. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 06-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. John Haltiwanger & Michael Waldman, 1983. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," UCLA Economics Working Papers, UCLA Department of Economics 303, UCLA Department of Economics.
  4. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
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  6. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004, Society for Computational Economics 277, Society for Computational Economics.
  7. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers, Society for Economic Dynamics 144, Society for Economic Dynamics.
  8. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  10. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  11. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(2), pages 349-89, April.
  12. Mankiw, N. Gregory & Reis, Ricardo, 2007. "Sticky Information in General Equilibrium," Scholarly Articles 3415323, Harvard University Department of Economics.
  13. Edward S. Knotek II, 2006. "A tale of two rigidities: sticky prices in a sticky-information environment," Research Working Paper, Federal Reserve Bank of Kansas City RWP 06-15, Federal Reserve Bank of Kansas City.
  14. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  15. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(2), pages 655-690, May.
  16. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 164-169, May.
  17. Mankiw, N Gregory & Reis, Ricardo, 2010. "Imperfect Information and Aggregate supply," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7711, C.E.P.R. Discussion Papers.
  18. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  19. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  20. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 345-370, April.
  21. Virgiliu Midrigan, 2005. "Menu Costs, Multi-Product Firms and Aggregate Fluctuations," Macroeconomics, EconWPA 0511004, EconWPA.
  22. Maral Kichian & Oleksiy Kryvtsov, 2007. "Does Indexation Bias the Estimated Frequency of Price Adjustment?," Working Papers, Bank of Canada 07-15, Bank of Canada.
  23. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1235-1257, October.
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