Rational inattention, multi-product firms and the neutrality of money

In a model where firms set prices under rational inattention we allow them to produce multiple goods. In addition to monetary shocks and firm-specific shocks, good-specific shocks affect firms, consistent with micro price data. When per-good expected losses in profits from inattention are held const...

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Bibliographic Details
Published in:Journal of monetary economics 2016-06, Vol.80, p.1-16
Main Authors: Pasten, Ernesto, Schoenle, Raphael
Format: Article
Language:English
Subjects:
Information processing
Monetary non-neutrality
Monetary theory
Multi-product firms
Pricing policies
Rational inattention
Studies
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Summary:In a model where firms set prices under rational inattention we allow them to produce multiple goods. In addition to monetary shocks and firm-specific shocks, good-specific shocks affect firms, consistent with micro price data. When per-good expected losses in profits from inattention are held constant, monetary non-neutrality quickly vanishes as the number of goods per firm rises. This result is due to (1) economies of scope that arise naturally in the multi-product setting, where processing information is costly but using already internalized information is free, and (2) good-specific shocks. •Economies of scope in information processing naturally arise in a rational inattention model of multi-product firms.•With good-specific shocks, attention to monetary shocks increases as firms produce more goods.•Micro price data suggest the existence of good-specific shocks.•Calibration to CPI data predicts perfect neutrality of money.•Calibration to PPI data predicts limited non-neutrality.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2016.04.004