TY  - JOUR
AU  - Angeletos,George-Marios
AU  - La'O,Jennifer
TI  - Incomplete Information, Higher-Order Beliefs and Price Inertia
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15003
PY  - 2009
Y2  - May 2009
UR  - http://www.nber.org/papers/w15003
L1  - http://www.nber.org/papers/w15003.pdf
N1  - Author contact info:
George-Marios Angeletos
Department of Economics
MIT E52-251
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/452-3859
Fax: 617/253-1330
E-Mail: angelet@mit.edu

Jennifer La'O
University of Chicago
Booth School of Business
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-9768
E-Mail: jenlao@chicagobooth.edu
AB  - 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.
ER  -