Price dynamics under imperfect information

The paper considers the pricing decision of a monopolist firm having demand and costs exposed to nominal and real shocks which include both permanent and transitory changes. The firm obtains information through both price and quantity signals and the price equation is found by use of a filtering technique. It is shown that imperfect information implies nominal price smoothing where the price adjusts only partially relative to the past price by incorporating new information observed through price and quantity signals.