a column by James Costain and Anton Nakov for VOX: CEPR’s Policy Portal
Recent low inflation is motivating new research to better characterise how individual firms and workers set prices and wages.
This column describes a new approach which emphasises that the costs of decision making may limit the precision of price and wage changes. As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment.
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