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Published online by Cambridge University Press: 18 December 2018
We study the interaction between dispersed and sticky information by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky information. We compute the unique equilibrium of the game induced by the firms’ pricing decisions and derive the resulting Phillips curve. The main effect of dispersion is to magnify the immediate impact of a given shock when the degree of stickiness is small. Its effect on persistence is minor: even when information is largely dispersed, a substantial amount of informational stickiness is needed to generate persistence in aggregate prices and inflation.
This paper is based on the first chapter of Marta Areosa’s PhD thesis (2010). We would like to thank Márcia Leon, Leonardo Rezende, Luciano Vereda, and Fábio Araújo. We are also grateful for comments from many seminar participants at PUC-Rio and Banco Central do Brasil. The financial support from Banco Central do Brasil is gratefully acknowledged. We are responsible for all errors and interpretations. The views expressed in the paper are those of the authors and do not necessarily reflect those of the Banco Central do Brasil.