Transcript Information Constraints as Micro-foundations for Nominal Rigidity

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