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Dynamic pricing and imperfect common knowledge

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  • Nimark, Kristoffer

Abstract

Introducing private information into the dynamic pricing decision of firms by adding an idiosyncratic component to marginal cost can help explain two stylised facts about price changes: Aggregate inflation responds gradually and with inertia to shocks at the same time as individual price changes can be large. The inertial behaviour of inflation is driven by privately informed firms strategically [`]herding' on the public information contained in the observations of lagged aggregate variables. The model also matches the average duration between price changes found in the data and it nests the standard New-Keynesian Phillips Curve as a special case. To solve the model, the paper derives an algorithm for solving a class of dynamic models with higher order expectations.

Suggested Citation

  • Nimark, Kristoffer, 2008. "Dynamic pricing and imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 365-382, March.
  • Handle: RePEc:eee:moneco:v:55:y:2008:i:2:p:365-382
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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