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Imperfect Common Knowledge and the Effects of Monetary Policy
Abstract
This paper reconsiders the Phelps-Lucas hypothesis, according to which temporary real effects of purely nominal disturbances result from imperfect information, but departs from the assumptions of Lucas (1973) in two crucial respects.Due to monopolistically competitive pricing, higher-order expectations are crucial for aggregate inflation dynamics, as argued by Phelps (1983).And decisionmakers' subjective perceptions of current conditions are assumed to be of imperfect precision, owing to finite information processing capacity, as argued by Sims (2001).The model can explain highly persistent real effects of a monetary disturbance, and a delayed effect on inflation, as found in VAR studies.
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Cites
Forecasting, Structural Time Series Models and the Kalman Filter
Harvey, A. C. (1990) · doi:10.1017/cbo9781107049994 · Cited by 4,195
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Optimal Sticky Prices under Rational Inattention
Maćkowiak, B., & Wiederholt, M. (2009) · American Economic Review · doi:10.1257/aer.99.3.769 · Cited by 963
Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve
Mankiw, N. G. G., & Reis, R. A. M. R. (2001) · SSRN Electronic Journal · doi:10.2139/ssrn.268692 · Cited by 688
Overreaction in Macroeconomic Expectations
Bordalo, P., Gennaioli, N., Ma, Y., & Shleifer, A. (2020) · American Economic Review · doi:10.1257/aer.20181219 · Cited by 608
Information Markets and the Comovement of Asset Prices
Veldkamp, L. L. (2006) · The Review of Economic Studies · doi:10.1111/j.1467-937x.2006.00397.x · Cited by 409
How Do Expectations about the Macroeconomy Affect Personal Expectations and Behavior?
Roth, C., & Wohlfart, J. (2020) · The Review of Economics and Statistics · doi:10.1162/rest_a_00867 · Cited by 266
Metadata
- Authors
- WOODFORD, M.
- Venue
- Knowledge, Information, and Expectations in Modern Macroeconomics
- Publisher
- Princeton University Press
- Published
- 2021-01-12
- Pages
- 25-58
- OpenAlex
- W3124699338
- Cited by
- 390
- References
- 1
- FWCI
- 52.45
- Type
- book chapter
- Language
- en
- Open access
- closed
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