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Sticky Information and Inflation Persistence: Evidence from U.S. Data

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  • Benedetto Molinari

    () (Department of Economics, Universidad Pablo de Olavide)

Abstract

This paper provides a novel single equation estimator of the Sticky Information Phillips Curve (SIPC), which permits to estimate the exact model without any approximation or truncation. In detail, information stickiness is estimated by employing a GMM estimator that matches the theoretical with the actual covariances between current inflation and the lagged exogenous shocks that affect firms’ pricing decisions, which are considered the moments that measure inflation persistence. The main result of the paper is to show that the SIPC model can match inflation persistence only at the cost of mispredicting the variance of inflation, which is a novel finding in the empirical literature on the SIPC.

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File URL: http://www.upo.es/serv/bib/wps/econ1009.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 10.09.

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Length: 34 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:pab:wpaper:10.09

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Keywords: Sticky Information; Inflation Persistence; two-stage GMM estimator;

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References

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  1. N. Gregory Mankiw & Ricardo Reis, 2006. "Sticky Information in General Equilibrium," NBER Working Papers 12605, National Bureau of Economic Research, Inc.
  2. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  3. Oleg Korenok, 2005. "Empirical Comparison of Sticky Price and Sticky Information Models," Working Papers 0501, VCU School of Business, Department of Economics.
  4. Ignazio Angeloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling," Working Papers 242, Barcelona Graduate School of Economics.
  5. Reis, Ricardo, 2005. "Inattentive Producers," CEPR Discussion Papers 5393, C.E.P.R. Discussion Papers.
  6. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  7. Michael Kiley, 2005. "A Quantitative Comparison Of Sticky-Price And Sticky-Information Models Of Price Setting," Computing in Economics and Finance 2005 183, Society for Computational Economics.
  8. Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2010. "Inflation-Gap Persistence in the US," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 43-69, January.
  9. Tamim Bayoumi & Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers 04/24, International Monetary Fund.
  10. Olivier Coibion, 2007. "Testing the Sticky Information Phillips Curve," Working Papers 61, Department of Economics, College of William and Mary.
  11. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  12. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  13. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Wiley Blackwell, vol. 73(3), pages 793-821, 07.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  15. 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.
  16. Khan, Hashmat & Zhu, Zhenhua, 2006. "Estimates of the Sticky-Information Phillips Curve for the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 195-207, February.
  17. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  18. Hashmat Khan & Zhenhua Zhu, 2002. "Estimates of the Sticky-Information Phillips Curve for the United States, Canada, and the United Kingdom," Working Papers 02-19, Bank of Canada.
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Cited by:
  1. Orlando Gomes, 2012. "Transitional Dynamics in Sticky-Information General Equilibrium Models," Computational Economics, Society for Computational Economics, vol. 39(4), pages 387-407, April.

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