This paper by Kristoffer Nimark of the Reserve Bank of Australia introduces private information into the dynamic pricing decision of firms in an otherwise standard new Keynesian model by adding an idiosyncratic component to firms' marginal costs.

The model can then replicate two stylised facts about price changes: aggregate inflation responds gradually and with inertia to shocks, while at the same time price changes of individual goods can be quite large.

The inertial behaviour of inflation is