Optimal Sticky Prices under Rational Inattention

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type , Research , Preprint 01 Jan 2009 Germany English Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

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Authors: Bartosz Mackowiak; Mirko Wiederholt;

doi: 10.2139/ssrn.1333608 , 10.3790/ccm.52.4.573 , 10.1257/aer.99.3.769

handle: 10419/293877 , 10419/153443 , 10419/25054

Optimal Sticky Prices under Rational Inattention

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Abstract

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, E52)

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Germany

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Keywords

Wirtschaftsmodell, Preismanagement, Betriebliche Preispolitik, sticky prices, rational inattention, real effects of nominal shocks, sticky prices, E3, Preisführer, E5, E52, E31, Unvollkommene Information, rational inattention, rational inattention; real effects of nominal shocks; sticky prices, ddc:330, 330 Wirtschaft, real effects of nominal shocks, rational inattention, sticky prices, real effects of nominal shocks, D83, Entscheidung bei Unsicherheit, Schock, D8, Theorie, D21, Rational Inattention: Sticky Prices, Real Effects of Nominal Shocks, jel: jel:D83, jel: jel:D21, jel: jel:E3, jel: jel:E5, jel: jel:E52, jel: jel:E31, jel: jel:D8

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