Incomplete information, higher-order beliefs and price inertia
By: George-Marios Angeletos, Jennifer La'O.
Contributors: La'O, Jennifer.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15003; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15003.
Publisher: National Bureau of Economic Research
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This paper investigates who incomplete information impacts the response of prices to nominal shocks.  Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise.  In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions.  This result synthesizes the broader lessons of the pertinent literature.  We next highlight that his synthesis provides only a partial view of the role or incomplete information.  In general, the precision of information does not pin down the response of higher-order beliefs.  Therefore, once cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or the agents' forecasts of inflation.  We highlight the distinct role of higher-order beliefs with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/16/2009.

Includes bibliographical references.

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