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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.

Suggested Citation

  • Coibion Olivier, 2006. "Inflation Inertia in Sticky Information Models," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-29, January.
  • Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:1
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    Citations

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    Cited by:

    1. Wang, Pengfei & Wen, Yi, 2007. "Inflation dynamics: A cross-country investigation," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2004-2031, October.
    2. Ricardo Reis, 2009. "Optimal Monetary Policy Rules in an Estimated Sticky-Information Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 1-28, July.
    3. Mohamed Safouane Ben Aïssa & Olivier Musy, 2011. "The Dynamic Properties Of Alternative Assumptions On Price Adjustment In New Keynesian Models," Bulletin of Economic Research, Wiley Blackwell, vol. 63(4), pages 353-384, October.
    4. Meyer-Gohde, Alexander, 2010. "Linear rational-expectations models with lagged expectations: A synthetic method," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 984-1002, May.
    5. Ricardo Reis, 2009. "A Sticky-information General Equilibrium Model por Policy Analysis," Central Banking, Analysis, and Economic Policies Book Series,in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 8, pages 227-283 Central Bank of Chile.
    6. repec:mbr:jmonec:v:10:y:2015:i:1:p:1-23 is not listed on IDEAS
    7. Lena Draeger, 2011. "Endogenous persistence with recursive inattentiveness," KOF Working papers 11-285, KOF Swiss Economic Institute, ETH Zurich.
    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.
    9. repec:hrv:faseco:33907956 is not listed on IDEAS
    10. 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.
    11. Olivier Coibion & Yuriy Gorodnichenko, 2011. "Strategic Interaction among Heterogeneous Price-Setters in an Estimated DSGE Model," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 920-940, August.
    12. Francesco Giuli, 2007. "Robust control in a Sticky information economy," Working Papers 98, University of Rome La Sapienza, Department of Public Economics.

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