Working Paper: CEPR ID: DP5393
Authors: Ricardo Reis
Abstract: I present and solve the problem of a producer who faces costs of acquiring, absorbing, and processing information. I establish a series of theoretical results describing the producer's behaviour. First, I find the conditions under which she prefers to set a plan for the price she charges, or instead prefers to set a plan for the quantity she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behaviour of many such producers. I apply these results to a model of inflation. I find that the model can fit the quantitative facts on post-war inflation remarkably well, that it is a good forecaster of future inflation, and that it survives the Lucas critique by fitting also the pre-war facts on inflation moderately well.
Keywords: inattentiveness; inflation; pricing under uncertainty; production; sticky information
JEL Codes: D92; E20; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inattentiveness (D91) | inflation dynamics (E31) |
| planning costs (O22) | frequency of price adjustments (E30) |
| elasticity of demand (D12) | choice between price and quantity planning (P22) |
| curvature of the demand function (D11) | choice between price and quantity planning (P22) |
| distribution of inattentiveness (D39) | aggregate behavior of prices (E30) |