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PRICE-LEVEL DETERMINATION UNDER DISPERSED INFORMATION AND MONETARY POLICY

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  • This paper was prepared for an invited lecture at the Annual Meeting of the Japanese Economic Association at Chuo University, Tokyo in 2005. I am grateful to Bernardo Guimaraes, Hitoshi Mio and an anonymous referee for helpful discussions and comments.

Abstract

This paper considers the determination of aggregate price level under dispersed information. A Central Bank sets policy in response to its noisy measure of the price level, and each agent makes its decisions by observing a subset of data. Information revealed to the agents and the bank is determined endogenously. It is shown that the aggregate state of the economy is not revealed perfectly to anybody but this economy behaves as if it is a representative-agent economy in which the representative agent has perfect information while the Bank has partial information. The Bank's information set affects fluctuations in the price level through its effect on policy.

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