Inflation Regimes And Price-Setting Interactions

A large body of empirical work is clear-cut in suggesting that the international post-war inflation experience may be described in terms of switches among multiple regimes. A definite explanation of this stylized fact, however, is still under debate. In this paper, we model an economy composed of a large number of interacting price-setting firms which can replicate the evidence at hand. Interactions emerge as a by-product of consumers' uncertainty on the prices charged by different firms. The underlying Markovian structure possesses a stationary distribution with multiple modes, so that its associated dynamics is characterized by multiple regimes and sudden transitions among them. In particular, for any (almost-fully accommodating) monetary policy reaction function, the existence of a multiplicity of inflation regimes is associated to the information acquisition technology consumers have in searching for the lowest price.