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Integrating Sticky Prices and Sticky Information

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Author Info

  • Bill Dupor

    (Ohio State University)

  • Tomiyuki Kitamura

    (Bank of Japan)

  • Takayuki Tsuruga

    (Kansai University)

Abstract

Understanding the relationship between nominal and real variables, most notably inflation and cyclical output, is one of the fundamental questions of economics. Toward this understanding, we develop a model that integrates sticky prices and sticky information-a dual-stickiness model. We find that both rigidities are present in U.S. data. We also show that the dual-stickiness model's closest competitor is the hybrid New Keynesian model. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward-looking behavior. U.S. data support the dual-stickiness model over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 3 (August)
Pages: 657-669

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Handle: RePEc:tpr:restat:v:92:y:2010:i:3:p:657-669

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. J. A. Carrillo, 2011. "How Well Does Sticky Information Explain the Dynamics of Inflation, Output, and Real Wages?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/724, Ghent University, Faculty of Economics and Business Administration.
  2. Torres Torres, Diego José, 2009. "The Dual Stickiness Model and Inflation Dynamics in Spain," MPRA Paper 18031, University Library of Munich, Germany.
  3. Benjamin D. Keen & Evan F. Koenig, 2009. "How robust are popular models of nominal frictions?," Working Papers 0903, Federal Reserve Bank of Dallas.
  4. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2008. "Accounting for Persistence and Volatility of Good-Level Real Exchange Rates: The Role of Sticky Information," Vanderbilt University Department of Economics Working Papers 0810, Vanderbilt University Department of Economics.
  5. Shin-Ichi Nishiyama, 2011. "How Important are Financial Shocks for the Canadian Business Cycle?," TERG Discussion Papers 276, Graduate School of Economics and Management, Tohoku University.
  6. Arslan, M. Murat, 2010. "Relative importance of sticky prices and sticky information in price setting," Economic Modelling, Elsevier, vol. 27(5), pages 1124-1135, September.
  7. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
  8. Goecke, Henry & Luhan, Wolfgang J. & Roos, Michael W.M., 2013. "Rational inattentiveness in a forecasting experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 80-89.

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