Working Paper: NBER ID: w31796
Authors: Hassan Afrouzi
Abstract: This paper studies how competition affects firms’ expectations in a new dynamic general equilibrium model with rational inattention and oligopolistic competition where firms acquire information about their competitors’ beliefs. In the model, firms with fewer competitors are less attentive to aggregate variables—a novel prediction supported by survey evidence. A calibrated version of the model matches the relationship between firms’ numbers of competitors and their uncertainty about aggregate inflation as a non-targeted moment. A quantitative exercise reveals that firms’ strategic inattention to aggregates significantly amplifies monetary non-neutrality and shifts output response disproportionately towards less competitive oligopolies by distorting relative prices.
Keywords: rational inattention; inflation dynamics; monetary nonneutrality; oligopolistic competition
JEL Codes: E31; E32; E71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition (L13) | firms' expectations about aggregate inflation (E31) |
| firms' expectations about aggregate inflation (E31) | output response to monetary policy shocks (E39) |
| competition (L13) | strategic inattention (D80) |
| strategic inattention (D80) | firms' expectations about aggregate prices (E30) |
| competition (L13) | less informed about aggregate shocks (D89) |
| less informed about aggregate shocks (D89) | price changes covary less with aggregate inflation expectations (E31) |