Information structure and the transmission of inflationary expectations

Abstract

This paper explores the implications of extending the natural-rate model of macroeconomics by expanding agents' information sets and elaborating the structure of information flow. The atomistic information structure of the standard model is replaced by information structures in which agents have access to at least one additional current price in an informationally neighboring market. Several alternative information structures are proposed and explored, including network-like arrays in which all markets are linked directly or indirectly by information sharing. The analysis demonstrates how moments of the time distribution of inflationary shocks, cross-sectional distributions of inflation estimates and forecasts, and the time profile of adjustment to inflationary shocks can all be influenced significantly by the underlying information structure.