No abstract

No abstract

I present a model of social learning over an exogenous, directed network that may be readily nested within broader macroeconomic models with dispersed information and combines the attributes that agents (a) act repeatedly and simultaneously; (b) are Bayes-rational; and (c) have strategic interaction in their decision rules. To overcome the challenges imposed by these requirements, I suppose that the network is opaque: agents do not know the full structure of the network, but do know the link distribution. I derive a specific law of motion for the hierarchy of aggregate expectations, which includes a role for network shocks (weighted sums of agents' idiosyncratic shocks). The network causes agents' beliefs to exhibit increased persistence, so that average expectations overshoot the truth following an aggregate shock. When the network is sufficiently (and plausibly) irregular, transitory idiosyncratic shocks cause persistent aggregate effects, even when agents are identically sized and do not trade.JEL classification: C72, D82, D83, D84

Modifying the standard New-Keynesian model to replace firms' full information and sticky prices with flexible prices and dispersed information, and imposing mild and plausible restrictions on the monetary authority's decision rule, produces the striking results that (i) there exists a unique and globally stable steady-state rate of inflation, despite the possibility of a lower bound on nominal interest rates; and (ii) in the vicinity of steady-state, the price level is determinate (and not just the rate of inflation), despite the central bank targeting inflation. The specification of firms' signal extraction problem under dispersed information removes the need to make use of Blanchard-Kahn conditions to solve the model, thereby removing the need to adhere to the Taylor principle and consequently circumventing the critique of Cochrane (2011). The model admits a determinate, stable solution with no role for sunspot shocks when the monetary authority responds by less than one-for-one to changes in expected inflation, including under an interest rate peg. An extension to include incomplete information on the part of the central bank permits the consideration of (rational) errors of judgement on the part of policymakers and provides a theoretical basis for inertial policymaking without interest rate smoothing, in support of Rudebusch (2002Rudebusch ( , 2006.

No abstract