Description:
Previous studies have stressed that in ation dynamics exhibit a substantial disper- sion across sectors. Using US producer price data, we present evidence that sectoral in ation persistence is negatively correlated with market concentration, which is diffi- cult to reconcile with the prediction of the standard model of monopolistic competition. To explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, strategic complementarity among firms increases as market concentration decreases. Because higher strategic complementarity generates greater in ation persistence, our model suc- cessfully replicates the observed negative correlation between in ation persistence and market concentration across sectors.