Imperfect Common Knowledge, Staggered Price Setting, and the Effects of Monetary Policy

2007/09/13 by ICHIRO FUKUNAGA, Ichiro Fukunaga · 1 citation
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Economic theories and models #Italy: Economic History and Contemporary Issues

paper · pdf · doi:10.1111/j.1538-4616.2007.00084.x

Abstract

This paper studies the consequences of a lack of common knowledge in the transmission of monetary policy by integrating the Woodford (2003a) imperfect common knowledge model with Taylor–Calvo staggered price‐setting models. The average price set by monopolistically competitive firms depends on their higher‐order expectations about not only the current state of the economy but also about the states in the future periods in which prices are to be fixed. This integrated model provides a plausible explanation for the observed effects of monetary policy: it shows analytically how price adjustments are delayed and how the response of output to monetary disturbances is amplified.

Citations

• Expectations and the neutrality of money

Cited by

• Imperfect information, composition of demand shocks, and the flattening of the Phillips curve

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