Paciello, Luigi (2007): The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention.
Download (473kB) | Preview
The speed of inflation adjustment to aggregate technology shocks is substantially larger than to monetary policy shocks. Prices adjust very quickly to technology shocks, while they only respond sluggishly to monetary policy shocks. This evidence is hard to reconcile with existing models of stickiness in prices. I show that the difference in the speed of price adjustment to the two types of shocks arises naturally in a model where price setting firms optimally decide what to pay attention to, subject to a constraint on information flows. In my model, firms pay more attention to technology shocks than to monetary policy shocks when the former affects profits more than the latter. Furthermore, strategic complementarities in price setting generate complementarities in the optimal allocation of attention. Therefore, each firm has an incentive to acquire more information on the variables that the other firms are, on average, more informed about. These complementarities induce a powerful amplification mechanism of the difference in the speed with which prices respond to technology shocks and to monetary policy shocks.
|Item Type:||MPRA Paper|
|Original Title:||The Response of Prices to Technology and Monetary Policy Shocks under Rational Inattention|
|Keywords:||Rational inattention, Price responsiveness|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles|
|Depositing User:||Luigi Paciello|
|Date Deposited:||23. Jul 2009 05:58|
|Last Modified:||12. Feb 2013 12:04|
Adam, Klaus. 2007. "Optimal Monetary Policy with Imperfect Common Knowledge." Journal of Monetary Economics. Vol. 54(2), 276-301, 2007.
1.Altig, David, Lawrence J., Martin Eichenbaum, and Jesper Linde. 2005."Firm-Specific Capital, Nominal Rigidities and the Business Cycle", National Bureau of Economic Research working paper 11034.
2.Ball, Lawrence and David Romer. 1990. "Real Rigidities and the Non-Neutrality of Money." Review of Economic Studies, 57, 183-203.
3.Basu, Susanto. 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare." American Economic Review, vol. 85(3), pages 512-31, June.
4.Basu, Susanto, Fernald John and Kimball Miles Spencer. 2004. "Are Technology Improvements Contractionary?" American Economic Review, vol. 96(5), pages 1418-1448, December.
10.Christiano, Lawrence J., Martin Eichenbaum, and Charles Evans. 1999. "Monetary Policy Shocks: What Have We Learned and to What End?" In "Handbook of Macroeconomics", edited by John B. Taylor and Michael Woodford, Elsevier, New York.
14.Cover, Thomas M., and Joy A. Thomas (1991). "Elements of Information Theory." John Wiley and Sons, New York. 15.Fernald, John. 2007. "A Quarterly, Utilization-Corrected Series on Total Factor Productivity". Federal Reserve Bank of San Francisco Discussion Paper.
16.Fisher, D.M. Jonathan. 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks". Journal of Political Economy, Volume 114.
17.Galí, Jordi, and Mark Gertler. 1999. "Inflation Dynamics: A structural Econometric Analysis." Journal of Monetary Economics, 44 (October): 195-222.
18.Gali, Jordi. 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?" American Economic Review. 89 (March): 249-271.
20.Golosov, Mikhail and Robert Lucas. 2006. "Menu Costs and Phillips Curves." Journal of Political Economy, vol. 115(2), pages 171-199, April.
21.Hellwig, Christian and Laura Veldkamp. 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition". Discussion paper, New York University.
26.Mankiw, N. Gregory, and Ricardo Reis. 2006. "Pervasive Stickiness". The American Economic Review, Volume 96, Number 2, May 2006 , pp. 164-169(6).
27.Maćkowiak, Bartosz, and Mirko Wiederholt. 2007. "Optimal Sticky Prices under Rational Inattention". CEPR discussion paper 6243.
31.Nakamura, Emi, and Jón Steinsson. 2007. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model". Harvard University. 32.Nakamura, Emi and Jón Steinsson. 2007b. "Five Facts About Prices: A Reevaluation of Menu Cost Models". Discussion paper, Harvard University.
35.Orphanides, Athanasios. 2003b. "Historical monetary policy analysis and the Taylor rule." Journal of Monetary Economics, vol. 50(5), pages 983-1022, July.
38.Paciello, Luigi. 2007. "The Response of Prices to Technology and Monetary Policy Shocks: An Empirical Investigation." Northwestern University Discussion paper.
40.Reis, Ricardo. 2006. "Inattentive Producers." Review of Economic Studies. 73, 793-821.
41.Sims, A. Christopher. 1999. "Stickiness." Carnegie-Rochester Conference Series on Public Policy, 49, 317-356.
42.Sims, A. Christopher."Implications of Rational Inattention". Journal of Monetary Economics, Volume 50, Number 3, April 2003 , pp. 665-690(26).
43.Sims, A. Christopher. 2006. "Rational Inattention: Beyond the Linear Quadratic Case." American Economic Review Papers and Proceedings, 96, 158-163.
44.Smets, Frank and Ralf Wouters. 2003. "An estimated stochastic Dynamic General Equilibrium Model of the Euro Area. "Journal of European Economic Association, 1, 1123-1175.
45.Smets, Frank and Ralf Wouters. 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach". American Economic Review, vol. 97(3), pages 586-606, June. 46.Uhlig, Harald. 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure." Journal of Monetary Economics, Volume 52, Issue 2, March 2005, Pages 381-419.
48.Woodford, Michael. 2002. "Imperfect Common Knowledge and the Effects of Monetary Policy". In "Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps", edited by Philippe Aghion et al., Princeton University Press, Princeton and Oxford.
49.Woodford, Michael. 2003. "Interest and Prices. Foundations of a Theory of Monetary Policy." Princeton University Press, Princeton and Oxford.
50.Zbaracki, Mark J., Mark Ritson, Daniel Levy, Shantanu Dutta and Mark Bergen. 2004. "Managerial and Customer Costs of Price Adjustments: Direct Evidence from Industrial Markets." Review of Economics and Statistics, 86, 514-533.
51.Zbaracki, Mark J., Daniel Levy, Shantanu Dutta and Mark Bergen. 2007. "The Anatomy of a Price Cut: Discovering Organizational Sources of the Costs of Price Adjustment." Emory University Economics Working Paper.