English, Article, Journal or magazine article edition: Optimal Sticky Prices under Rational Inattention Bartosz Maćkowiak; Bartosz Mackowiak; Mirko Wiederholt

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Sticky Prices under Rational Inattention
Author
  • Bartosz Maćkowiak
  • Bartosz Mackowiak
  • Mirko Wiederholt
Physical Description
  • preprint
Notes
  • 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 prices react only slowly and by small amounts to nominal shocks. Nominal shocks have strong and persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms’ environment. JEL Classification: E3, E5, D8.
  • RePEc:ecb:ecbwps:200901009
  • RePEc:red:sed005:369
  • In the data, individual prices change frequently and by large amounts. In standard sticky price models, frequent and large price changes imply a fast response of the aggregate price level to nominal shocks. This paper presents a model in which price setting firms optimally decide what to observe, 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 the data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks. Nominal shocks have persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms’ environment.
  • rational inattention, sticky prices, real effects of nominal shocks
  • RePEc:hum:wpaper:sfb649dp2005-040
Language
  • English
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