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Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

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  • N. Gregory Mankiw
  • Ricardo Reis

Abstract

This paper examines a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared to the commonly used sticky-price model, this sticky-information model displays three, related properties that are more consistent with accepted views about the effects of monetary policy. First, disinflations are always contractionary (although announced disinflations are less contractionary than surprise ones). Second, monetary policy shocks have their maximum impact on inflation with a substantial delay. Third, the change in inflation is positively correlated with the level of economic activity.

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Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1922.

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Date of creation: 2001
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Handle: RePEc:fth:harver:1922

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