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Incomplete Information and Informative Pricing: Theory and Application


  • University of California

    (San Diego)

  • Giacomo Rondina


This paper studies the information contained in the equilibrium aggregate price level of an economy where firms make output price decisions faced with incomplete information about economy-wide disturbances. It is shown that when heterogeneously informed firms are allowed to extract information from the equilibrium aggregate price, the ability of the aggregate price to be a sufficient statistics of the underlying aggregate disturbance depends on the degree of strategic complementarity in firms' pricing strategy. As the incentive to price similarly increases, aggregate price goes from a perfect to an imperfect signal of changes in the aggregate state of the economy. More generally, this paper contributes to the expanding literature on monetary business cycle and incomplete information initiated by Woodford (2003a) in three directions. First, it proposes a set of techniques in the frequency domain that allow for the explicit derivation of individual heterogeneous expectations in a log-linear framework while preserving the tractability of the equilibrium fixed point condition. Second, it develops and solves a stylized model where aggregate price plays a key informational role for imperfectly informed firms of the type advocated by Hayek. Finally, it presents an application to monetary policy in a setting with a simple feedback rule for the supply of money.

Suggested Citation

  • University of California & Giacomo Rondina, 2008. "Incomplete Information and Informative Pricing: Theory and Application," 2008 Meeting Papers 981, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:981

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    References listed on IDEAS

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    7. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
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    9. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    10. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
    11. Kenneth Kasa & Todd B. Walker & Charles H. Whiteman, 2006. "Asset Prices in a Time Series Model with Perpetually Disparately Informed, Competitive Traders," Caepr Working Papers 2006-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    12. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    13. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-1144, December.
    14. Taub, Bart, 1989. "Aggregate fluctuations as an information transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 13(1), pages 113-150, January.
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    Cited by:

    1. repec:hrv:faseco:33907956 is not listed on IDEAS
    2. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
    3. Bin Chen & Jinho Choi & Juan Carlos Escanciano, 2017. "Testing for fundamental vector moving average representations," Quantitative Economics, Econometric Society, vol. 8(1), pages 149-180, March.
    4. repec:oup:restud:v:84:y:2017:i:2:p:853-884. is not listed on IDEAS
    5. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 853-884.
    6. Leonardo Melosi, 2011. "Public's Inflation Expectations and Monetary Policy," 2011 Meeting Papers 1151, Society for Economic Dynamics.
    7. Leonardo Melosi, 2009. "A Likelihood Analysis of Models with Information Frictions," 2009 Meeting Papers 1034, Society for Economic Dynamics.
    8. Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2007. "A Review of Nonfundamentalness and Identification in Structural VAR Models," LEM Papers Series 2007/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    9. Jennifer La'O, 2010. "Collateral Constraints and Noisy Fluctuations," 2010 Meeting Papers 780, Society for Economic Dynamics.

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