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Information-constrained state-dependent pricing

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  • Woodford, Michael

Abstract

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 Unpublished, Princeton University].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.

Suggested Citation

  • Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
  • Handle: RePEc:eee:moneco:v:56:y:2009:i:s:p:s100-s124
    DOI: 10.1016/j.jmoneco.2009.06.014
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    More about this item

    Keywords

    Rational inattention; Generalized Ss model; Adjustment hazard; Calvo model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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