Inflation, Stagflation, Relative Prices, and Imperfect by Alex Cukierman

By Alex Cukierman

This booklet surveys the imperfect-information method of inflation and its genuine results. sorts of informational hindrance are thought of. One comprises events during which members have uneven information regarding the present basic expense point and hence confuse relative and combination alterations in costs. the opposite considers events within which participants can't distinguish everlasting from transitory alterations once they take place, making a transitority yet chronic confusion among such alterations. the writer provides the arguments in the context of the new re-evaluations through economists of formerly demonstrated perspectives referring to inflation and its interplay with actual phenomena.

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Extra resources for Inflation, Stagflation, Relative Prices, and Imperfect Information

Sample text

Hence the incentive to spend resources to become informed increases when this var­ iance increases . When a futures market opens, two prices transmit information from the informed to the uninformed. One is, as before, the spot price of the Asymmetric information and prices 27 good; the other is the futures price. Together these two prices reveal all the privileged information of the informed (including total current out­ put and the conditional expected value of the next period's spot price given 8).

This notion is discussed more fully in Section 4. To maintain some incentive for becoming informed , Grossman intro­ duces an additional source of uncertainty in the form of a stochastic (for the uninformed) risk-aversion parameter for informed firms. As a result the price system no longer perfectly transmits the information of the in­ formed to the uninformed and the incentive to collect costly information is retained. Under these circumstances there are two motives for taking positions in the futures market.

At the other extreme when pj = 0, price does not reveal any information about () . Grossman and Stiglitz show that pj i s an increasing function of r and a decreasing function of the cost of becoming informed and of the risk­ aversion parameter of informed individuals . The first result just states that an increase in the quality of information of the informed also in­ creases the quality of information carried through price. Changes in all other exogenous parameters do not affect pj because they trigger two conflicting effects that cancel each other.

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