Incomplete Information and Informative Pricing: Theory and Application
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.
|Date of creation:||2008|
|Date of revision:|
|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: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- HELLWIG, Martin F., .
"Rational expectations equilibrium with conditioning on past prices: a mean-variance example,"
CORE Discussion Papers RP
480, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Hellwig, Martin F., 1982. "Rational expectations equilibrium with conditioning on past prices: A mean-variance example," Journal of Economic Theory, Elsevier, vol. 26(2), pages 279-312, April.
- Kenneth Kasa, 2000.
"Forecasting the Forecasts of Others in the Frequency Domain,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 726-756, October.
- Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
- Taub, Bart, 1989. "Aggregate fluctuations as an information transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 13(1), pages 113-150, January.
- Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
- 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.
- King, Robert G, 1982. "Monetary Policy and the Information Content of Prices," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 247-79, April.
- George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, 07.
- Jeffery Amato & Hyun Shin, 2006. "Imperfect common knowledge and the information value of prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 213-241, 01.
- Laurence Ball & David Romer, 1987.
"Real Rigidities and the Non-Neutrality of Money,"
NBER Working Papers
2476, National Bureau of Economic Research, Inc.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- George-Marios Angeletos & Ivan Werning, 2004.
"Crises and Prices: Information Aggregation, Multiplicity and Volatility,"
NBER Working Papers
11015, National Bureau of Economic Research, Inc.
- Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
- Ivan Werning & George-Marios Angeletos, 2005. "Crises and Prices: Information Aggregation, Multiplicity and Volatility," 2005 Meeting Papers 284, Society for Economic Dynamics.
- Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
- 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.
- Guido Lorenzoni, 2006. "Demand Shocks and Monetary Policy," Computing in Economics and Finance 2006 524, Society for Computational Economics.
- 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.
When requesting a correction, please mention this item's handle: RePEc:red:sed008:981. 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 references are entirely missing, you can add them using this form.