Optimal Sticky Prices under Rational Inattention
Mackowiak, Bartosz, and
Mirko Wiederholt. 2009. "Optimal Sticky Prices under Rational Inattention."
American Economic Review,
This paper presents a model in which price setting firms decide what to pay
attention to, subject to a constraint on information flow. When idiosyncratic
conditions are more variable or more important than aggregate conditions,
firms pay more attention to idiosyncratic conditions than to aggregate conditions.
When we calibrate the model to match the large average absolute size of
price changes observed in micro data, prices react fast and by large amounts to
idiosyncratic shocks, but only slowly and by small amounts to nominal shocks.
Nominal shocks have strong and persistent real effects. (JEL D21, D83, E31,
Article Full-Text Access
Download Data Set
Mackowiak, Bartosz (European Central Bank)
Wiederholt, Mirko (Northwestern U)
D21: Firm Behavior
D83: Search; Learning; Information and Knowledge; Communication; Belief
E31: Price Level; Inflation; Deflation
E52: Monetary Policy