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

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  • 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.

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  • Hassan Afrouzi, 2023. "Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money," NBER Working Papers 31796, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31796
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    2. Michael Weber & Francesco D'Acunto & Yuriy Gorodnichenko & Olivier Coibion, 2022. "The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications," Journal of Economic Perspectives, American Economic Association, vol. 36(3), pages 157-184, Summer.
    3. Yotzov, Ivan & Bloom, Nicholas & Bunn, Philip & Mizen, Paul & Thwaites, Gregory, 2024. "The speed of firm response to inflation," Bank of England working papers 1085, Bank of England.
    4. Olivier Wang & Iván Werning, 2022. "Dynamic Oligopoly and Price Stickiness," American Economic Review, American Economic Association, vol. 112(8), pages 2815-2849, August.
    5. Link, Sebastian & Peichl, Andreas & Roth, Christopher & Wohlfart, Johannes, 2023. "Information frictions among firms and households," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 99-115.
    6. Frache, Serafin & Lluberas, Rodrigo & Turen, Javier, 2024. "Belief-dependent pricing decisions," Economic Modelling, Elsevier, vol. 132(C).
    7. Meyer, Brent H. & Prescott, Brian C. & Sheng, Xuguang Simon, 2023. "The impact of supply chain disruptions on business expectations during the pandemic," Energy Economics, Elsevier, vol. 126(C).
    8. Konchitchki, Yaniv & Xie, Jin, 2023. "Undisclosed material inflation risk," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 82-100.
    9. Nadine McCloud, 2022. "Does domestic investment respond to inflation targeting? A synthetic control investigation," International Economics, CEPII research center, issue 169, pages 98-134.
    10. Gondhi, Naveen, 2023. "Rational inattention, misallocation, and the aggregate economy," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 50-75.
    11. Brent Meyer & Nicholas B. Parker & Xuguang Sheng, 2021. "Unit Cost Expectations and Uncertainty: Firms' Perspectives on Inflation," FRB Atlanta Working Paper 2021-12a, Federal Reserve Bank of Atlanta.
    12. Meyer, Brent H. & Prescott, Brian & Sheng, Xuguang Simon, 2022. "The impact of the COVID-19 pandemic on business expectations," International Journal of Forecasting, Elsevier, vol. 38(2), pages 529-544.
    13. Macaulay, Alistair, 2021. "The attention trap: Rational inattention, inequality, and fiscal policy," European Economic Review, Elsevier, vol. 135(C).
    14. Zorn, Peter, 2016. "Investment under Rational Inattention: Evidence from US Sectoral Data," VfS Annual Conference 2016 (Augsburg): Demographic Change 145572, Verein für Socialpolitik / German Economic Association.
    15. Hassan Afrouzi & Choongryul Yang, 2021. "Dynamic Rational Inattention and the Phillips Curve," CESifo Working Paper Series 8840, CESifo.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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