Consumer Imperfect Information and Endogenous Price Rigidity
- (pp. 94-123)
Abstract
This paper studies the propagation of monetary shocks in an economy featuring a strategic microfoundation for price rigidities. Following an aggregate shock to money, most consumers are initially uninformed. The market for goods is decentralized. Firms are better off delaying the adjustment of prices until enough consumers learn. At the same time, consumers learn from firms that have adjusted prices. The implied endogenous information diffusion follows a Bernoulli differential equation, implying a nonlinear path of learning. Nonlinear learning implies hump-shaped dynamics of output and inflation. A quantitative exercise suggests that these dynamics can be sizable and persistent.Citation
L'Huillier, Jean-Paul. 2020. "Consumer Imperfect Information and Endogenous Price Rigidity." American Economic Journal: Macroeconomics, 12 (2): 94-123. DOI: 10.1257/mac.20170203Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D40 Market Structure, Pricing, and Design: General
- D82 Asymmetric and Private Information; Mechanism Design
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation
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