IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Empirical evidence on models of rational inattention

Listed author(s):
  • Peter J. Klenow
  • Jonathan L. Willis

At low inflation rates, the main motivation for price changes is idiosyncratic shocks to firms and industries. In standard models of sticky prices, the existence of these idiosyncratic shocks makes prices more flexible and hence monetary policy less powerful to affect real variables (and less needed for offsetting other shocks). In some new "rational inattention" models (e.g., Sims 2004), in contrast, idiosyncratic shocks can make monetary policy more powerful (and more helpful). Idiosyncratic shocks can preoccupy managers so that they devote fewer resources to adjusting to aggregate economic conditions. We plan to compare these new rational inattention theories to the pricing patterns in the micro data collected by the U.S. Bureau of Labor Statistics for the Consumer Price Index. The BLS data will allow us to calculate the size of idiosyncratic firm and industry shocks at the level of 200 to 300 categories of consumption. One cannot do this using the average frequency of price changes for these sectors, as reported in Bils and Klenow (2004). Our primary interest is to use the data to address the question: does a firm's price respond less quickly to aggregate shocks if it faces larger idiosyncratic shocks in its industry, as predicted by rational inattention models? We can condition this on the estimated menu costs in the industry, and can also investigate whether menu costs themselves correlate with more or less rapid responses to aggregate shocks. Importantly, the comparison between models and evidence will be quantitative: we care not just whether the sign goes in the direction predicted by the theory, but the magnitude of the relationship

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 36.

in new window

Date of creation: 03 Dec 2006
Handle: RePEc:red:sed006:36
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed006:36. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.