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Information-constrained state-dependent pricing

Listed author(s):
  • Woodford, Michael

A model is presented in which decisions about when to review a firm's existing price must be made on the basis of imprecise awareness of current market conditions. Imperfect information is endogenized using a variant of the theory of “rational inattention” proposed by Sims [1998. Stickiness. Carnegie-Rochester Conference Series on Public Policy 49, 317–356; 2003. Implications of rational inattention. Journal of Monetary Economics 50, 665–690; 2006. Rational inattention: a research agenda. Unpublished, Princeton University]. The resulting class of models includes the standard (full-information) “Ss” model as a limiting case, but statistics on individual price changes from micro data sets are better fit by a parameterization with substantial information costs. This can reconcile substantial real effects of nominal disturbances with evidence on the frequency of price changes.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): S ()
Pages: 100-124

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Handle: RePEc:eee:moneco:v:56:y:2009:i:s:p:s100-s124
DOI: 10.1016/j.jmoneco.2009.06.014
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  26. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1235-1257, October.
  27. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June.
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