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Rational Inattention, Multi-Product Firms and the Neutrality of Money

  • Ernesto Pasten

    (Banco Central de Chile and Toulouse School of Economics)

I augment the rational inattention model of price-setting to allow for multi-product firms. Firms exploit economies of scale in the use of information by acquiring aggregate information: Aggregate information is useful for pricing all goods; idiosyncratic information is only useful for pricing the good it is concerned. As a result, the model still quantitatively predicts average price changes observed in the data and low costs for firms due to the friction. However, the model also predicts one fourth of money non-neutrality when firms produce two goods instead of one. Money becomes almost neutral when firms produce five goods or more.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 346.

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Date of creation: 2012
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Handle: RePEc:red:sed012:346
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