Diego J. Perez

Price Setting Under Uncertainty About Inflation

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When setting prices firms use idiosyncratic information about the demand for their products as well as public information about the aggregate macroeconomic state. This paper provides an empirical assessment of the e ffects of the availability of public information about inflation on price setting. We exploit an event in which economic agents lost access to information about the inflation rate: starting in 2007 the Argentinean government began to misreport the national inflation rate. Our di fference-in-diff erence analysis reveals that this policy led to an increase in the coefficient of variation of prices of 18% with respect to its mean. This e ffect is analyzed in the context of a general equilibrium model in which agents make use of publicly available information about the inflation rate to set prices. We calibrate the model and use use it to further explore the eff ects of higher uncertainty about inflation on the e ffectiveness of monetary policy and aggregate welfare. We find that monetary policy becomes more e ffective in a context of higher uncertainty about inflation and that not reporting accurate measures of the CPI entails signif cant welfare losses.



Joint with Andres Drenik.