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Sticky Information in General Equilibrium

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Author Info
N. Gregory Mankiw
Ricardo Reis

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Abstract

This paper develops and analyzes a general-equilibrium model with sticky information. The only rigidity in goods, labor, and financial markets is that agents are inattentive, sporadically updating their information sets, when setting prices, wages, and consumption. After presenting the ingredients of such a model, the paper develops an algorithm to solve this class of models and uses it to study the model's dynamic properties. It then estimates the parameters of the model using U.S. data on five key macroeconomic time series. It finds that information stickiness is present in all markets, and is especially pronounced for consumers and workers. Variance decompositions show that monetary policy and aggregate demand shocks account for most of the variance of inflation, output, and hours. (JEL: E30, E10) (c) 2007 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 2-3 (04-05)
Pages: 603-613
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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:2-3:p:603-613

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November. [Downloadable!] (restricted)
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  2. Ricardo Reis, 2004. "Inattentive Consumers," NBER Working Papers 10883, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  4. Peng-fei Wang & Yi Wen, 2006. "Solving linear difference systems with lagged expectations by a method of undetermined coefficients," Working Papers 2006-003, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," Harvard Institute of Economic Research Working Papers 2111, Harvard - Institute of Economic Research. [Downloadable!]
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  6. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March. [Downloadable!] (restricted)
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  7. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September. [Downloadable!] (restricted)
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  8. Andres, Javier & Lopez-Salido, J. David & Nelson, Edward, 2005. "Sticky-price models and the natural rate hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 1025-1053, July. [Downloadable!] (restricted)
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  9. Oleg Korenok & Norman R. Swanson, 2005. "The Incremental Predictive Information Associated with Using Theoretical New Keynesian DSGE Models vs. Simple Linear Econometric Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 905-930, December. [Downloadable!] (restricted)
  10. Michael T. Kiley, 2006. "A quantitative comparison of sticky-price and sticky-information models of price setting," Finance and Economics Discussion Series 2006-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  11. Frank Smets & Rafael Wouters, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank. [Downloadable!]
  12. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Blackwell Publishing, vol. 73(3), pages 793-821, 07. [Downloadable!] (restricted)
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  13. repec:bep:maccon:v:6:y:2006:i:1:p:1374-1374 is not listed on IDEAS
  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frank Schorfheide, 2008. "DSGE model-based estimation of the new Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 397-433. [Downloadable!]
  2. Weber, Anke, 2007. "Heterogeneous expectations, learning and European inflation dynamics," Discussion Paper Series 1: Economic Studies 2007,16, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Jian Gao & Gang Gong & Xue-Zhong He, 2007. "Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy," Research Paper Series 199, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  4. Leonardo Melosi, 2009. "A Likelihood Analysis of Models with Information Frictions," PIER Working Paper Archive 09-009, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  5. Olivier Coibion & Yuriy Gorodnichenko, 2008. "What Can Survey Forecasts Tell Us About Informational Rigidities?," NBER Working Papers 14586, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Gabriel Galand, 2009. "The Neutrality of Money Revisited with a Bottom-Up Approach: Decentralisation, Limited Information and Bounded Rationality," Computational Economics, Springer, vol. 33(4), pages 337-360, May. [Downloadable!] (restricted)
  7. George-Marios Angeletos & Alessandro Pavan, 2006. "Socially Optimal Coordination: Characterization and Policy Implications," NBER Working Papers 12778, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Ricardo Reis, 2009. "A Sticky-Information General-Equilibrium Model for Policy Analysis," NBER Working Papers 14732, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Lanne, Markku & Luoma, Arto & Luoto, Jani, 2008. "A Naïve Sticky Information Model of Households’ Inflation Expectations," MPRA Paper 8663, University Library of Munich, Germany. [Downloadable!]
    Other versions:
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