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Sticky information and sticky prices

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  • Klenow, Peter J.
  • Willis, Jonathan L.

Abstract

In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. \"Sticky information\" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information.
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Suggested Citation

  • Klenow, Peter J. & Willis, Jonathan L., 2007. "Sticky information and sticky prices," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 79-99, September.
  • Handle: RePEc:eee:moneco:v:54:y:2007:i:sup1:p:79-99
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    1. Emmanuel Dhyne & Luis J. Álvarez & Hervé Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Working Paper Research 74, National Bank of Belgium.
    2. 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, Oxford University Press, vol. 117(4), pages 1295-1328.
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