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Sectoral inflation under fragmentation of information

Published online by Cambridge University Press:  15 January 2025

Tatsushi Okuda  and
Tomohiro Tsuruga Open the ORCID record for Tomohiro Tsuruga [Opens in a new window]
Tatsushi Okuda
Affiliation:
International Monetary Fund, Washington, DC, USA
Tomohiro Tsuruga*
Affiliation:
International Monetary Fund, Washington, DC, USA
*
Corresponding author: Tomohiro Tsuruga; Email: ttsuruga@imf.org
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Abstract

We examine the role of fragmentation of information in explaining the dynamics of sectoral inflation. Using the quarterly survey of firms’ prices and costs in Japan, we first document two empirical facts: the sensitivity of sectoral inflation to changes in sectoral costs monotonically decreases with the dispersion of changes in (i) current costs and (ii) those in the past. A direct application of the dispersed information model can reconcile the fact (i) but fails to reconcile the fact (ii). We then extend the standard imperfect information model to construct a dynamic general equilibrium model that features fragmentation of information, wherein a finite number of groups of firms exist and firms in the same group share common idiosyncratic noises in their signals. Using this model, we find that the degree of fragmentation of information plays a crucial role in explaining these empirical facts.

Keywords

inflation dynamicsimperfect informationsemi-public signalsE31D80L11
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e69
Copyright
© International Monetary Fund, 2025. Published by Cambridge University Press

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