Christopher Gust, Edward Herbst, and David López-SalidoWe develop a finite-horizon planning model in which firms choose how far ahead to plan when setting prices. Planning further ahead improves a firm's pricing decision but requires cognitive effort. We derive analytical solutions for a firm's chosen planning horizon and show that large and persistent aggregate demand or supply disturbances induce firms to plan further ahead, making inflation more sensitive to shocks and generating endogenous movements in inflation uncertainty. Quantitatively, we show that the model matches the positive relationship between the size of inflation forecast revisions and inflation uncertainty observed in the data.
Nothing contributes so much to the prosperity and happiness of a country as high profits