TY  - JOUR
AU  - Woodford,Michael
TI  - Imperfect Common Knowledge and the Effects of Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8673
PY  - 2001
Y2  - December 2001
UR  - http://www.nber.org/papers/w8673
L1  - http://www.nber.org/papers/w8673.pdf
N1  - Author contact info:
Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB  - This paper reconsiders the Phelps-Lucas hypothesis, according to which temporary real effects of purely nominal disturbances result from imperfect information, but departs from the assumptions of Lucas (1973) in two crucial respects. Due to monopolistically competitive pricing, higher-order expectations are crucial for aggregate inflation dynamics, as argued by Phelps (1983).  And decisionmakers' subjective perceptions of current conditions are assumed to be of imperfect precision, owing to finite information processing capacity, as argued by Sims (2001). The model can explain highly persistent real effects of a monetary disturbance, and a delayed effect on inflation, as found in VAR studies.
ER  -