Optimal Sticky Prices Under Rational Inattention

By Bartosz Mackowiak, Mirko Wiederholt. Kredit und Kapital, 2009

1,021 citations recorded by the source corpus.

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

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/873e07b18bd9b9e0f33f6181852dd2fbb196a5de

How researchers see this paper

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In Economics and Econometrics

1. John Leahy
2. Andrew Caplin
3. Mark Dean
4. Anna Lusardi
5. B. Kőszegi
6. Matthew Rabin
7. Roland Bénabou
8. Olivia S. Mitchell

In Finance

1. John Leahy
2. Andrew Caplin
3. Mark Dean
4. B. Kőszegi
5. Matthew Rabin
6. Roland Bénabou
7. Larry G. Epstein

Citations in the corpus

• Man-Bites-Dog Business Cycles (2014, neutral): “…in the full information rational expectations models, or non-zero but constant as in models with private but time-invariant information structures, e.g. Lorenzoni (2009), Mackowiak and Wiederholt (2009), Graham and Wright (2009), Nimark (2008, 2010) Angeletos and La’O (2009, 2010) or Melosi (2011).”
• The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment (2016, neutral): “Our primary conclusion is that our results help provide a microfoundation for models in which agents form expectations rationally but face information constraints (Sims, 2003; Reis, 2006a, 2006b; Maćkowiak & Wiederholt, 2009).”
• A Theory of Demand Shocks (2009, neutral): “Expressing everything in terms of the state zt, the equilibrium coe¢ cients must satisfy � ep qpep 1 qaex qd ( + ep) qz� � zt = 0; ( 40 ) � ep + bpep 1 baex bd ( + ep) bz� � zt = 0; (41)”
• Animal spirits and monetary policy (2008, neutral): “It is now also generally recognized that the cognitive limitation of individuals in understanding and processing information leads them to use simple rules ("heuristics") to guide their behaviour (see Gabaix, Laibson, Moloche, and Weinberg, 2006).”
• Policy with Dispersed Information (2007, neutral): “In fact, it is then and only then the unique solution to ( 20 ) coincides with the strategy obtained in”
• DYNAMIC PRICING AND IMPERFECT COMMON KNOWLEDGE (2008, neutral): “Second, the models of Mankiw and Reis (2002), Woodford (2002) and Mackowiak and Wiederholt (2005) are all closed by using a constant-velocity-of-money type of equation.”
• Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination (2016, neutral): “…to many of the recent applications of rational inattention, including Luo (2008), Matejka (2015a, 2015b), and Matejka et al. (2015); but not to those that let rational inattention be, in effect, a specific micro-foundation of strategic uncertainty, such as Maćkowiak and Wiederholt (2009, 2015).”
• Price Setting during Low and High Inflation: Evidence from Mexico (2007, neutral): “[36] Máckowiak, Bartosz and Mirko Wiederholt.”
• Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost (2012, neutral): “Using the calibration of Mankiw and Reis (2002) where the quarterly probability of firms to update their information set is set to 0.”
• The Determinants of International Investment and Attention Allocation: Using Internet Search Query Data (2010, neutral): “subject to the information processing constraint �i;1 + �i;2 � � and �i;j � 0 ( 10 )”