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A Likelihood Analysis of Models with Information Frictions

  • Leonardo Melosi

    (University of Pennsylvania)

This paper develops a dynamic stochastic general equilibrium model where firms are imperfectly informed. We estimate the model through likelihood-based methods and find that it can explain the highly persistent real effects of monetary disturbances that are documented by a benchmark VAR. The model of imperfect information nests a model of rational inattention where firms optimally choose the variances of signal noise, subject to an information-processing constraint. We present an econometric procedure to evaluate the predictions of this rational inattention model. Implementing this procedure delivers insights on how to improve the fit of rational inattention models.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1034.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1034
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  12. Paciello, Luigi, 2007. "The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention," MPRA Paper 5763, University Library of Munich, Germany.
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  19. Laura Veldkamp & Stijn Van Nieuwerburgh, 2004. "Information Immobility and the Home Bias Puzzle," Working Papers 04-32, New York University, Leonard N. Stern School of Business, Department of Economics.
  20. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
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  26. Jesús Fernández-Villaverde & Juan F. Rubio, 2003. "Comparing Dynamic Equilibrium Economies to Data," Levine's Working Paper Archive 506439000000000309, David K. Levine.
  27. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  28. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  29. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
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  31. Kristoffer Nimark, 2007. "Dynamic Pricing and Imperfect Common Knowledge," RBA Research Discussion Papers rdp2007-12, Reserve Bank of Australia.
  32. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  33. University of California & Giacomo Rondina, 2008. "Incomplete Information and Informative Pricing: Theory and Application," 2008 Meeting Papers 981, Society for Economic Dynamics.
  34. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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