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

Listed author(s):
  • 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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File URL: https://economicdynamics.org/meetpapers/2012/paper_346.pdf
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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
Handle: RePEc:red:sed012:346
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/
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