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Pricing Policies And Inflation Dynamics

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  • Cespedes, Luis Felipe
  • Kumhof, Michael
  • Parrado, Eric

Abstract

The paper proposes a New Keynesian monetary model where firms' pricing policies feature a forward-looking optimal choice of the rate of price growth. The model can be thought of as a reduced form model of rational inattention that has only one additional state variable relative to the Calvo model [Journal of Monetary Economics 12 (1983), 383–398]. Like the model of backward-looking automatic indexation to past aggregate inflation, it generates a gradual and persistent reaction of the inflation rate, and output losses, following highly persistent monetary shocks. But unlike that model, its price setters behave very similarly to Calvo price setters when shocks are transitory.

Suggested Citation

  • Cespedes, Luis Felipe & Kumhof, Michael & Parrado, Eric, 2012. "Pricing Policies And Inflation Dynamics," Macroeconomic Dynamics, Cambridge University Press, vol. 16(4), pages 576-604, September.
    • Handle: RePEc:cup:macdyn:v:16:y:2012:i:04:p:576-604_00
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