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Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities

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  • Gaetano Gaballo

Abstract

This article shows that when agents learn from prices, large private uncertainty may result from a small amount of heterogeneity. As in a Phelps–Lucas island model, final producers look at the prices of their local inputs to infer aggregate conditions. However, market linkages between islands make the informativeness of local prices endogenous to general equilibrium relations. In this context, I show that a vanishingly small heterogeneity in local conditions is enough to generate an equilibrium in which prices are rigid to aggregate shocks and transmit only partial information. I use this insight as a microfoundation for price rigidity in an otherwise frictionless monetary model and show that even a tiny amount of dispersion in fundamentals can lead to large non-neutrality of money.

Suggested Citation

  • Gaetano Gaballo, 2018. "Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 1070-1110.
    • Handle: RePEc:oup:restud:v:85:y:2018:i:2:p:1070-1110.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx043
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    Cited by:

    1. Chan, Jenny, 2024. "Monetary policy and sentiment-driven fluctuations," Journal of Economic Theory, Elsevier, vol. 222(C).
    2. Ryan Chahrour & Gaetano Gaballo, 2021. "Learning from House Prices: Amplification and Business Fluctuations [House Price Booms and the Current Account]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(4), pages 1720-1759.
    3. Kenza Benhima & Isabella Blengini, 2020. "Optimal Monetary Policy when Information is Market-Generated," The Economic Journal, Royal Economic Society, vol. 130(628), pages 956-975.
    4. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    5. Plantin, Guillaume, 2023. "Asset bubbles and inflation as competing monetary phenomena," Journal of Economic Theory, Elsevier, vol. 212(C).
    6. George-Marios Angeletos & Chen Lian, 2023. "Determinacy without the Taylor Principle," Journal of Political Economy, University of Chicago Press, vol. 131(8), pages 2125-2164.
    7. Huo, Zhen & Pedroni, Marcelo, 2023. "Dynamic information aggregation: Learning from the past," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 107-124.
    8. Asriyan, Vladimir & Fuchs, William & Green, Brett, 2021. "Aggregation and design of information in asset markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 191(C).
    9. Anja Sebbesen & Harald Oberhofer, 2024. "The propagation of business expectations within the European Union," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(6), pages 1082-1103, September.
    10. Guillaume Plantin, 2021. "Asset Bubbles and Inflation as Competing Monetary Phenomena," Working Papers hal-03792088, HAL.
    11. Jonathan J Adams, 2021. "Firestorm: Multiplicity in Models with Full Information," Working Papers 001006, University of Florida, Department of Economics.
    12. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    13. Andrade, Philippe & Coibion, Olivier & Gautier, Erwan & Gorodnichenko, Yuriy, 2022. "No firm is an island? How industry conditions shape firms’ expectations," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 40-56.
    14. Angeletos, George-Marios & Iovino, Luigi & La'O, Jennifer, 2020. "Learning over the business cycle: Policy implications," Journal of Economic Theory, Elsevier, vol. 190(C).
    15. Gaetano Gaballo, 2016. "Rational Inattention to News: The Perils of Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 42-97, January.
    16. Plantin, Guillaume, 2021. "Asset Bubbles and Inflation as Competing Monetary Phenomena," CEPR Discussion Papers 15197, C.E.P.R. Discussion Papers.
    17. Jenny Chan, 2024. "Monetary policy and sentiment-driven fluctuations," Bank of England working papers 1106, Bank of England.
    18. Guillaume Plantin, 2021. "Asset Bubbles and Inflation as Competing Monetary Phenomena," Sciences Po Economics Publications (main) hal-03792088, HAL.

    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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