Information Constraints as Micro-foundations for Nominal Rigidity Filip Matějka CERGE-EI, A joint...
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Transcript of Information Constraints as Micro-foundations for Nominal Rigidity Filip Matějka CERGE-EI, A joint...
Information Constraints as Micro-foundations for Nominal
Rigidity
Filip MatějkaCERGE-EI,
A joint workplace of Charles University and Academy of Sciences of the Czech Republic
Understanding nominal rigidity is important
Why aren’t most prices perfectly flexible? • Inflation picks up a few months after interest rates are
cut by a central bank
• Decrease in consumption tax often doesn’t translate in immediate decrease of prices
• Input cost hikes do not have rapid effects
Understanding nominal rigidity is important• Keynes’ explanation for monetary policy effects
• Prices affect most economic decisions, etc.
Information Constraints as Micro-foundations for Nominal Rigidity
This paper: • Explanation why prices are rigid
• Prices are rigid because people do not pay full attention to changes in the economy
• Specific implications, mathematical formalization
Sluggishness Standard models of nominal rigidity
• Predict immediate response of GDP, unempl. to nominal shocks
More general friction needed: information (Chris Sims) ..Rational Inattention
Do we really have little info? When investing, choosing a vacation destination,
negotiating a deal…, we should know the exchange rates
If we do not pay attention, we can not react to changes
Yes, I think so… Not even economists pay attention to economic
variables, at least the young ones don’t
More important variables are followed more closely
Enough Hand-waving: Information Theory
Mathematically, knowledge is described as probability distribution
Processing information narrows the distribution
Choosing what to learn is how to narrow the distribution
Economics, Behavioral Insights, Mathematics
Models simulate
1.What information is acquired
2.What is the response
Price responses to shocks
Findings
Competitive industries respond to others’ prices rather than input costs, taxes, etc.
• They can lose a lot by being more expensive
Volatile and competitive industries respond faster
• they always need to pay more attention
Firms respond faster in unusual times
• Hyperinflation, crisis, ..
• Central bank becomes less efficient
Applications Central Banks
• What interest rate adjustment path to adopt
• Transparency is good
Fiscal Policy
• How to stimulate economy the fastest (what industries, what forms)
• Simpler tax codes are beneficial (uniform rates, etc. )
• Birth bonuses(?) vs. subsidies on baby shoes, public transportation, exhibitions, etc.
Optimal regulation
• No caps on taxi prices
Other Applications of Rational Inattention
Sudden changes of behavior, with Chris Sims
• Portfolio reallocation
Optimal number of offered varieties, with Alisdair McKay
• How many different types of jam to offer
• How many pension plans
How much discretion to provide subordinates with
Hayek’s informational efficiency of markets