Optimal Sticky Prices under Rational Inattention
2009/05/01 by Bartosz Maćkowiak, Mirko Wiederholt · 990 citations
Economics, Econometrics and Finance · Mathematics · #Aggregate (composite) #Aggregate data #Constraint (computer-aided design) #Econometrics #Economic theories and models #Economics #Financial Markets and Investment Strategies #Mathematics #Microeconomics #Monetary Policy and Economic Impact #Monetary economics #Rational expectations #Statistics
paper · open access · doi:10.1257/aer.99.3.769
published in American Economic Review 99(3), 769-803 (American Economic Association)
openalex publication_date 2009/05/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/03
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)
Citations
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