Incomplete Information , Higher-Order Beliefs and Price Inertia ∗

@inproceedings{Angeletos2009IncompleteI,
  title={Incomplete Information , Higher-Order Beliefs and Price Inertia ∗},
  author={George-Marios Angeletos},
  year={2009}
}
This paper investigates how incomplete information impacts the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons… CONTINUE READING
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