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Imperfect Common Knowledge, Staggered Price Setting, and the Effects of Monetary Policy
Author(s) -
FUKUNAGA ICHIRO
Publication year - 2007
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2007.00084.x
Subject(s) - imperfect , economics , monetary policy , order (exchange) , imperfect competition , common knowledge (logic) , price setting , monetary economics , set (abstract data type) , macroeconomics , microeconomics , computer science , finance , philosophy , linguistics , programming language , multimodal logic , epistemic modal logic , description logic
This paper studies the consequences of a lack of common knowledge in the transmission of monetary policy by integrating the Woodford (2003a) imperfect common knowledge model with Taylor–Calvo staggered price‐setting models. The average price set by monopolistically competitive firms depends on their higher‐order expectations about not only the current state of the economy but also about the states in the future periods in which prices are to be fixed. This integrated model provides a plausible explanation for the observed effects of monetary policy: it shows analytically how price adjustments are delayed and how the response of output to monetary disturbances is amplified.