Rational inattention, menu costs, and multi-product firms: Micro evidence and aggregate implications.

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Author: Choongryul Yang
Date: May 2022
Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 382 words

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Keywords Inflation expectations; Monetary non-neutrality; Rational inattention; Menu costs; Multi-product firms; Economies of scope Highlights * Using a New Zealand firm-level survey, I show that firms producing more goods have both better information about inflation and more frequent but smaller price changes. * I develop a new general equilibrium menu cost model with rationally inattentive multi-product firms to study monetary non-neutrality. * The interaction of nominal and informational rigidities leads to a new selection effect such that price adjusters are better informed than non-adjusters. * This selection endogenously generates a leptokurtic distribution of desired price changes, which amplifies monetary non-neutrality. * Compared to a one-product baseline, the real effects of monetary shocks are 12% smaller in a two-product model. Abstract Using a New Zealand firm-level survey, I show that firms producing more goods have both better information about inflation and more frequent but smaller price changes. To explain these empirical findings, I develop a general equilibrium menu cost model with rationally inattentive multi-product firms. I show that the interaction of nominal and informational rigidities leads to a new selection effect: Price adjusters are better informed than non-adjusters. This selection endogenously generates a leptokurtic distribution of desired price changes, which amplifies monetary non-neutrality. Compared to a one-product baseline, the real effects of monetary shocks are 12 percent smaller in a two-product model. Author Affiliation: Federal Reserve Board, United States Article History: Received 26 July 2021; Revised 11 April 2022; Accepted 11 April 2022 (footnote)[white star] This paper is a revised version of the first chapter of my Ph.D. dissertation at UT Austin. I would like to thank Olivier Coibion and Saroj Bhattarai for their guidance and support. I am grateful to Yuriy Gorodnichenko, the editor, an anonymous referee, Hassan Afrouzi, Chris Boehm, Carlos Carvalho, Stefano Eusepi, Cooper Howes, Andreas Mueller, Ernesto Pasten, Claudia Sahm, Raphael Schoenle, Antonella Tutino, and seminar participants at Fed Board, Boston Fed, Cleveland Fed, Dallas Fed, KC Fed, UT Austin, U of Edinburgh, Santa Clara U, HKUST, HKU, NUS, Sogang University, MEG 2019, ESEWM 2019, CEBRA 2020, ESWC 2020, SEA 2020, and SED 2021 for helpful comments and suggestions. I acknowledge the Texas Advanced Computing Center (TACC) at UT Austin for providing HPC resources that have contributed to the simulation results reported within this paper. Byline: Choongryul Yang [choongryul.yang@frb.gov]

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Gale Document Number: GALE|A703193419