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Inflation Inertia in Sticky Information Models

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  • Coibion Olivier

    ()
    (University of Michigan)

Abstract

This paper considers whether the sticky information model of Mankiw and Reis (2002) can robustly deliver inflation inertia. I find that four features of the model play a key role in determining inflation inertia: the frequency of information updating, the degree of real rigidities, the nature and persistence of monetary policy, and the presence or not of information stickiness elsewhere in the economy. Real rigidities serve to dampen firms’ desired price changes and are a critical element in delivering inflation inertia. The type of monetary policy, money-growth vs. interest rate rules, also matters, with Taylor rules making inflation inertia less likely than under money growth rules. Adding sticky information in consumption to the model yields a more gradual adjustment of output, thereby decreasing the incentive for firms to change prices on impact and increasing the inertia of inflation. I also explore the implications of using random versus fixed durations of information rigidity and argue that with the latter, the choice of the policy rule has a smaller effect on the qualitative response of inflation. These results allow us to sort out some conflicting conclusions on inflation inertia in sticky information models and suggest that inertia is more sensitive to parameter choices than previously thought.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 1 (January)
Pages: 1-29

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Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:1

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Cited by:
  1. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series 201103, Hamburg University, Department Wirtschaft und Politik.
  2. N. Gregory Mankiw & Ricardo Reis, 2007. "Sticky Information in General Equilibrium," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 603-613, 04-05.
  3. Alexander Meyer-Gohde, 2007. "Solving Linear Rational Expectations Models with Lagged Expectations Quickly and Easily," SFB 649 Discussion Papers SFB649DP2007-069, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model," NBER Working Papers 14323, National Bureau of Economic Research, Inc.
  5. Ricardo Reis, 2009. "A Sticky-Information General-Equilibrium Model for Policy Analysis," NBER Working Papers 14732, National Bureau of Economic Research, Inc.
  6. Peng-fei Wang & Yi Wen, 2006. "Inflation dynamics: a cross-country investigation," Working Papers 2005-076, Federal Reserve Bank of St. Louis.
  7. Francesco Giuli, 2007. "Robust control in a Sticky information economy," Working Papers 98, University of Rome La Sapienza, Department of Public Economics.
  8. Lanne, Markku & Luoma, Arto & Luoto, Jani, 2009. "A naïve sticky information model of households' inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1332-1344, June.

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