This paper studies how measured beliefs can be used to identify monetary non-neutrality. In a general equilibrium model with both nominal rigidities and endogenous information acquisition, we analytically characterize firms’ optimal dynamic information policies and how their beliefs affect monetary non-neutrality. We then show that data on the cross-sectional distributions of uncertainty and pricing durations are both necessary and sufficient to identify monetary non-neutrality. Finally, implementing our approach in New Zealand survey data, we find that informational frictions approximately double monetary non-neutrality and endogeneity of information is important: models with exogenous information would overstate monetary non-neutrality by approximately 50%.
Authors
- Acknowledgements & Disclosure
- This paper was formerly circulated under the title: “Selection in Information Acquisition and Monetary Non-Neutrality.” We are grateful to Olivier Coibion and Yuriy Gorodnichenko for their invaluable feedback and for sharing data. We also thank Saroj Bhattarai, Mark Dean, Chen Lian, Giuseppe Moscarini, Karthik Sastry, Luminita Stevens, and Michael Woodford as well as seminar participants at Columbia University, University of Notre Dame, LMU Munich, Princeton University, University of Texas at Austin, the Federal Reserve Banks of Cleveland, Richmond, and St. Louis, the Federal Reserve Board, and the NBER Monetary Economics conference for thoughtful comments and suggestions. The views expressed herein are those of the authors and do not reflect the views of the Federal Reserve Board, any person associated with the Federal Reserve System, or the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32541
- Published in
- United States of America
Table of Contents
- Introduction 3
- Model: Sticky Prices with Information Acquisition 8
- Households 8
- Firms' Production, Pricing, and Profits 9
- Firms' Costly Information Acquisition 11
- The Firm's Problem 11
- Equilibrium 12
- Firms' Information Acquisition 12
- Optimal Information Acquisition 12
- The Economic Forces That Shape Optimal Uncertainty 14
- Selection and Uncertainty 17
- Implications for Monetary Non-Neutrality 17
- From Firm-Level Price Gaps to The Aggregate Output Gap 18
- Characterization of Lifetime Output Gaps 19
- The Propagation of Monetary Shocks 21
- Comparative Statics for Monetary Non-Neutrality 23
- Identification of the Real Effects of Monetary Policy 25
- The Distributions of Uncertainty and Pricing Durations Are Sufficient for Identification 25
- Data on Price Changes Are Insufficient for Identification 26
- Using Survey Data to Quantify and Test the Model 27
- Survey Data on Firms' Uncertainty and Pricing Duration 27
- The Quantitative Impact of Uncertainty and Selection 28
- Robustness: Heterogeneity, Measurement Error, and General Time-Dependence 31
- Counterfactuals: How Microeconomic Volatility and Price Stickiness Affect Monetary Non-Neutrality 33
- Microeconomic Volatility 34
- Price Stickiness 35
- Conclusion 37
- Proofs 41
- Proof of Theorem 1 41
- Proof of Corollary 1 43
- Proof of Corollary 2 43
- Proof of Corollary 4 43
- Proof of Proposition 1 43
- Proof of Theorem 2 44
- Proof of Proposition 2 46
- Proof of Proposition 3 46
- Proof of Proposition 4 47
- Proof of Proposition 5 48
- Proof of Theorem 3 48
- Additional Figures and Tables 50
