Nominal Rigidities, Rational Inattention, and the Optimal Price Index Stabilization Policy

62 Pages Posted: 30 Nov 2023

See all articles by Shengliang Ou

Shengliang Ou

Shanghai University of Finance and Economics

Penghui Yin

Central University of Finance and Economics

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn; National University of Singapore (NUS), Department of Economics

Renbin Zhang

Shandong University

Abstract

The Optimal Price Index (OPI) stabilization policy traditionally assigns greater importance to stabilize prices in sectors with stickier prices based on multi-sector models with full information or exogenous information frictions. The current paper challenges this prevailing policy prescription by introducing rational inattention. Surprisingly, the OPI attaches a smaller weight to a sector with stickier prices. This counterintuitive result stems from the endogenous relationship between attention and nominal rigidities: firms in sectors with more flexible prices pay less attention to macroeconomic conditions. We provide empirical evidence that supports this mechanism.

Keywords: Sticky Prices, Endogenous Information Acquisition, Price Index Stabilization, Optimal Policy

Suggested Citation

Ou, Shengliang and Yin, Penghui and Zhang, Donghai and Zhang, Renbin, Nominal Rigidities, Rational Inattention, and the Optimal Price Index Stabilization Policy. Available at SSRN: https://ssrn.com/abstract=4648918 or http://dx.doi.org/10.2139/ssrn.4648918

Shengliang Ou

Shanghai University of Finance and Economics ( email )

NO. 777 Guoding Road
Shanghai, 200433
China

Penghui Yin

Central University of Finance and Economics ( email )

Donghai Zhang (Contact Author)

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

National University of Singapore (NUS), Department of Economics ( email )

Singapore
Singapore

Renbin Zhang

Shandong University ( email )

shanda nanlu 27
jinan, Shandong 250100
China

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