@techreport{NBERw15003,
 title = "Incomplete Information, Higher-Order Beliefs and Price Inertia",
 author = "George-Marios Angeletos and Jennifer La'O",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "15003",
 year = "2009",
 month = "May",
 URL = "http://www.nber.org/papers/w15003",
 abstract = {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.},
}