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Consumer Imperfect Information and Endogenous Price Rigidity†

Consumer Imperfect Information and Endogenous Price Rigidity† AbstractThis paper studies the propagation of monetary shocks in an economy featuring a strategic microfoundation for price rigidities. Following an aggregate shock to money, most consumers are initially uninformed. The market for goods is decentralized. Firms are better off delaying the adjustment of prices until enough consumers learn. At the same time, consumers learn from firms that have adjusted prices. The implied endogenous information diffusion follows a Bernoulli differential equation, implying a nonlinear path of learning. Nonlinear learning implies hump-shaped dynamics of output and inflation. A quantitative exercise suggests that these dynamics can be sizable and persistent. (JEL D11, D21, D40, D82, E23, E31) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Consumer Imperfect Information and Endogenous Price Rigidity†

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Publisher
American Economic Association
Copyright
Copyright © 2020 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20170203
Publisher site
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Abstract

AbstractThis paper studies the propagation of monetary shocks in an economy featuring a strategic microfoundation for price rigidities. Following an aggregate shock to money, most consumers are initially uninformed. The market for goods is decentralized. Firms are better off delaying the adjustment of prices until enough consumers learn. At the same time, consumers learn from firms that have adjusted prices. The implied endogenous information diffusion follows a Bernoulli differential equation, implying a nonlinear path of learning. Nonlinear learning implies hump-shaped dynamics of output and inflation. A quantitative exercise suggests that these dynamics can be sizable and persistent. (JEL D11, D21, D40, D82, E23, E31)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2020

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