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Sticky information and sticky prices

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

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 54 (2007)
Issue (Month): Supplement 1 (September)
Pages: 79-99

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Handle: RePEc:eee:moneco:v:54:y:2007:i:sup1:p:79-99
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004 277, Society for Computational Economics.
  2. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  3. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  4. Mark J. Zbaracki & Mark Bergen & Daniel Levy, 2006. "The Anatomy of a Price Cut: Discovering Organizational Sources of the Costs of Price Adjustment," Working Papers 2006-3, Bar-Ilan University, Department of Economics.
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  7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  8. Peter J. Klenow & Jonathan L. Willis, 2006. "Real rigidities and nominal price changes," Research Working Paper RWP 06-03, Federal Reserve Bank of Kansas City.
  9. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
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  11. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  12. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," Harvard Institute of Economic Research Working Papers 2111, Harvard - Institute of Economic Research.
  13. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
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  20. Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City.
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  22. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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