Working Paper: NBER ID: w11820
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 behavior. 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 behavior 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: No keywords provided
JEL Codes: D92; E31; E20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Information costs (D83) | Frequency of updating plans (C41) |
| Frequency of updating plans (C41) | Periods of inattentiveness (E32) |
| Demand elasticity and marginal costs (D40) | Decision-making process (price vs quantity plans) (D79) |
| Aggregation of individual behaviors (C92) | Distribution of inattentiveness (D39) |
| Higher costs (G19) | Longer periods of inattentiveness (C41) |
| Producers' choice of inattentiveness (D19) | Inflation dynamics (E31) |
| Elasticity of demand (D12) | Choice of planning (price vs quantity) (L11) |