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Setting The Right Prices for the Wrong Reasons

  • Venky Venkateswaran

    (UCLA)

  • Christian Hellwig

    (UCLA and CEPR)

about fundamentals based on their own cash flows (revenues and wages). We show that in a model with realistic levels of product-level price dispersion, the firms’ inference about aggregate shocks is very gradual, yet in the aggregate prices adjust rapidly in response to aggregate nominal shocks. When an aggregate shock occurs, firms mistakenly attribute it to firm-specific shocks, but adjust prices nevertheless, since the exact nature of the shock matters little for its optimal pricing decision.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 260.

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Date of creation: 2009
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Handle: RePEc:red:sed009:260
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  1. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2008. "Reference Prices and Nominal Rigidities," NBER Working Papers 13829, National Bureau of Economic Research, Inc.
  2. repec:bla:restud:v:76:y:2009:i:1:p:223-251 is not listed on IDEAS
  3. Laura Veldkamp & Christian Hellwig, 2006. "Knowing What Others Know: Coordination Motives in Information Acquisition," Working Papers 06-14, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Ariel Burstein & Christian Hellwig, 2007. "Prices and Market Shares in a Menu Cost Model," NBER Working Papers 13455, National Bureau of Economic Research, Inc.
  5. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  6. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
  7. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  8. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
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