scholarly journals Optimal Sticky Prices under Rational Inattention

2009 ◽  
Vol 99 (3) ◽  
pp. 769-803 ◽  
Author(s):  
Bartosz Maćkowiak ◽  
Mirko Wiederholt
Keyword(s):  
Information Flow ◽  
Sticky Prices ◽  
Price Setting ◽  
Micro Data ◽  
Rational Inattention ◽  
Absolute Size ◽  
Price Changes ◽  
Real Effects ◽  
Idiosyncratic Shocks ◽  
Nominal Shocks

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)

scholarly journals Optimal Sticky Prices Under Rational Inattention

2019 ◽  
Vol 52 (4) ◽  
pp. 573-617
Author(s):  
Bartosz Maćkowiak ◽  
Mirko Wiederholt
Keyword(s):  
Jel Classification ◽  
Special Importance ◽  
Rational Inattention ◽  
Absolute Size ◽  
Real Effects ◽  
Idiosyncratic Shocks ◽  
The Business Cycle ◽  
The Many ◽  
Many Sources ◽  
Nominal Shocks

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. An optimizing trader will process those prices of most importance to his decision problem most frequently and carefully, those of less importance less so, and most prices not at all. Of the many sources of risk of importance to him, the business cycle and aggregate behavior generally is, for most agents, of no special importance, and there is no reason for traders to specialize their own information systems for diagnosing general movements correctly. – Robert E. Lucas (1977, 21) JEL Classification: D21, D83, E31, E52

scholarly journals Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation *

2013 ◽  
Vol 129 (1) ◽  
pp. 215-258 ◽  
Author(s):  
Joseph Vavra
Keyword(s):  
Monetary Policy ◽  
Output Growth ◽  
Time Varying ◽  
Real Output ◽  
Price Setting ◽  
Micro Data ◽  
Real Effects ◽  
High Volatility ◽  
Price Flexibility ◽  
New Evidence

Abstract Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this article, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with “volatility shocks” and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply that output responds less to nominal stimulus during times of high volatility. Furthermore, because volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55% larger than the response in October 2001, a time of high volatility.

What Quantitative Micro Data Reveal about Price Setting Behavior

2007 ◽  
pp. 218-232 ◽  
Author(s):  
Roberto Sabbatini ◽  
Luis J. Álvarez ◽  
Emmanuel Dhyne ◽  
Marco Hoeberichts ◽  
Hervé Le Bihan ◽  
...  
Keyword(s):  
Price Setting ◽  
Micro Data

scholarly journals Firm Uncertainty Cycles and the Propagation of Nominal Shocks

2019 ◽  
Vol 11 (1) ◽  
pp. 276-337 ◽  
Author(s):  
Isaac Baley ◽  
Andrés Blanco
Keyword(s):  
Adjustment Costs ◽  
Individual Characteristics ◽  
Cross Sectional ◽  
Real Effects ◽  
Learning Speed ◽  
Pricing Behavior ◽  
Nominal Shocks ◽  
The Impact ◽  
Idiosyncratic Uncertainty ◽  
Low Uncertainty

We develop a framework to study the impact of idiosyncratic uncertainty on aggregate economic outcomes. Agents learn about individual characteristics, which receive infrequent, large, and persistent shocks. In this environment, idiosyncratic uncertainty moves in cycles, fluctuating between periods of high and low uncertainty; with additional fixed adjustment costs, the frequency and size of agents' actions also fluctuate in cycles. We apply our framework to study pricing behavior and the propagation of nominal shocks. We show, analytically and quantitatively, that idiosyncratic uncertainty cycles amplify the real effects of nominal shocks by generating cross-sectional dispersion in firms' adjustment frequency and in learning speed. (JEL D21, D81, D83, E31, E32, E52)

scholarly journals How Frequent Are Small Price Changes?

2014 ◽  
Vol 6 (2) ◽  
pp. 137-155 ◽  
Author(s):  
Martin Eichenbaum ◽  
Nir Jaimovich ◽  
Sergio Rebelo ◽  
Josephine Smith
Keyword(s):  
Price Index ◽  
Consumer Price Index ◽  
Empirical Work ◽  
Cost Models ◽  
Scanner Data ◽  
Micro Data ◽  
Price Changes ◽  
Nominal Rigidity ◽  
Menu Cost ◽  
Litmus Test

Recent empirical work suggests that small price changes are relatively common. This evidence has been used to criticize classic menu-cost models. In this paper, we use scanner data from a national supermarket chain and micro data from the Consumer Price Index to reassess the importance of small price changes. We argue that the vast majority of these changes are due to measurement error. We conclude that the evidence on the prevalence of small price changes is much too weak to be used as a litmus test of nominal rigidity models. (JEL C82, E31, L11, L81)

scholarly journals Shock Transmission Through Cross-Border Bank Lending: Credit and Real Effects

2019 ◽  
Vol 33 (10) ◽  
pp. 4839-4882 ◽  
Author(s):  
Galina Hale ◽  
Tümer Kapan ◽  
Camelia Minoiu
Keyword(s):  
Bank Lending ◽  
Banking Crises ◽  
Financial Networks ◽  
Financial Shocks ◽  
Real Effects ◽  
Cross Border ◽  
International Bank ◽  
Idiosyncratic Shocks ◽  
Shock Transmission ◽  
Using Data

Abstract We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997–2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.

scholarly journals Time or State Dependent Price Setting Rules? Evidence from Portuguese Micro Data

2005 ◽  
Author(s):  
Daniel Dias ◽  
Carlos Manuel Robalo Marques ◽  
João M.C Santos Silva
Keyword(s):  
Price Setting ◽  
Micro Data ◽  
State Dependent
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