NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Incomplete Information, Higher-Order Beliefs and Price Inertia

George-Marios Angeletos, Jennifer La'O

NBER Working Paper No. 15003
Issued in May 2009
NBER Program(s):   EFG   ME

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.

download in pdf format
   (466 K)

email paper

This paper is available as PDF (466 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15003

Published: Incomplete Information, Higher-Order Beliefs, and Price Inertia [slides] Journal of Monetary Economics 56:S1 (October 2009) (with Jennifer La'O)

Users who downloaded this paper also downloaded these:
Angeletos and La'O w14982 Noisy Business Cycles
Nadiri w2022 Price Inertia and Inflation: Evidence and Theoretical Rationale
Woodford w8673 Imperfect Common Knowledge and the Effects of Monetary Policy
Angeletos and La'O Noisy Business Cycles
Angeletos, Lorenzoni, and Pavan w15883 Beauty Contests and Irrational Exuberance: A Neoclassical Approach
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us