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  4. June 2009
  5. Optimal Sticky Prices under Rational Inattention

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Optimal Sticky Prices under Rational Inattention

  • Bartosz Mackowiak
  • Mirko Wiederholt
American Economic Review
vol. 99, no. 3, June 2009
(pp. 769–803)
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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. (JEL D21, D83, E31, E52)

Citation

Mackowiak, Bartosz, and Mirko Wiederholt. 2009. "Optimal Sticky Prices under Rational Inattention." American Economic Review, 99 (3): 769–803. DOI: 10.1257/aer.99.3.769

Additional Materials

JEL Classification

  • D21 Firm Behavior
  • D83 Search; Learning; Information and Knowledge; Communication; Belief
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy