Imperfect Common Knowledge, Staggered Price Setting, and the Effects of Monetary Policy
Institute for Monetary and Economic Studies, Bank of Japan, 2006 - Inflation (Finance) - 28 pages
"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 who can only observe the state of the economy through noisy private signals depends on their higher-order expectations about not only the current state 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. I also consider a more general information structure in which a noisy public signal, in addition to the private signals, is introduced."--Author's abstract.
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adjustments are delayed aggregate nominal spending alleviates the sluggishness Amato and Shin amount of noise average estimate average expectations operator average price chosen Bank of Japan baseline model business cycle Calvo-type price setting corresponding full-information staggered deﬁned deviations from steady difference equation Discussion Paper Series effects of monetary equilibrium paths extended model four periods full-information model full-information staggered price-setting imperfect common knowledge imperfect information implies improving precision impulse responses information sets initial response lack of common log deviations Mankiw and Reis monetary disturbance responses monetary policy monopolistically competitive Morris and Shin negative informational disturbance noisy public signal output and inﬂation output is ampliﬁed parameter values partial derivatives persistent real effects positive monetary disturbance price adjustments private information public information response of inﬂation response of output response of prices set of equilibrium set their prices sets of impulse staggered price staggered price-setting model stochastic process Taking the partial two-period staggered price-setting Woodford 2003a