The Transmission of International Monetary Policy Shocks on Firms' Expectations

Frache, Serafín; Lluberas, Rodrigo; Pedemonte, Mathieu; Turén, Javier

doi:10.2139/ssrn.4317804

Cited by 2 publications

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“…These responses indicate a high degree of strategic complementarity, which is in line with the standard calibrations of the analog of this parameter in the literature for the U.S. 22 This high degree of strategic complementarity is consistent with the large forecast errors of firms about aggregate inflation, as the model predicts these firms would pay a large amount of attention to what their competitors are doing. Based on the analysis in this paper, Frache and Lluberas (2017) ask the same question from firms in Uruguay. They find a much lower degree of strategic complementarity within that economy and consistent with the predictions of the model here they also document much smaller forecast errors of aggregate inflation among those firms.…”

Section: Number Of Competitors and Strategic Complementaritymentioning

confidence: 99%

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

Afrouzi

2023

SSRN Journal

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Section: Number Of Competitors and Strategic Complementaritymentioning

confidence: 99%

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

Afrouzi

2023

SSRN Journal

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Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Afrouzi

2024

Journal of Political Economy

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In countries with low and stable inflation, price setters' inflation expectations are highly dispersed; especially so when they face fewer competitors. In contrast to the predictions of standard models, realized inflation deviates significantly from price setters' aggregate inflation expectations. Instead, firms' own-industry inflation expectations are more accurate, and aggregate inflation tracks these expectations closely. This paper poses a new dynamic general equilibrium model of rational inattention with oligopolistic pricing in which these patterns emerge from the optimal choices of firms in information acquisition. A new micro-founded Phillips curve relates aggregate inflation to firms' expectations about their own competitors' price changes, and firms optimally forego learning about aggregate variables to focus on their competitors' beliefs. This incentive is stronger when firms face fewer competitors and nonexistent under monopolistic competition. Using firm-level evidence, I calibrate the degree of rational inattention as well as industry concentration and find that, relative to the benchmark of monopolistic competition, the impact response of output (inflation) to a one percent monetary policy shock is 20 basis points larger (smaller) when these strategic incentives are accounted for. Limited competition at the micro-level also increases the half-lives of output and inflation responses to monetary policy shocks by 12% and 15%, respectively.

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The Transmission of International Monetary Policy Shocks on Firms' Expectations

Cited by 2 publications

References 0 publications

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

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