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Integrating Sticky Prices and Sticky Information

Author

Listed:
  • Bill Dupor

    (Ohio State University)

  • Tomiyuki Kitamura

    (Bank of Japan)

  • Takayuki Tsuruga

    (Kansai University)

Abstract

Understanding the relationship between nominal and real variables, most notably inflation and cyclical output, is one of the fundamental questions of economics. Toward this understanding, we develop a model that integrates sticky prices and sticky information-a dual-stickiness model. We find that both rigidities are present in U.S. data. We also show that the dual-stickiness model's closest competitor is the hybrid New Keynesian model. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward-looking behavior. U.S. data support the dual-stickiness model over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations.

Suggested Citation

  • Bill Dupor & Tomiyuki Kitamura & Takayuki Tsuruga, 2010. "Integrating Sticky Prices and Sticky Information," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 657-669, August.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:3:p:657-669
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    Citations

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    Cited by:

    1. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
    2. Crucini, Mario J. & Shintani, Mototsugu & Tsuruga, Takayuki, 2010. "Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information," Journal of International Economics, Elsevier, vol. 81(1), pages 48-60, May.
    3. Ryo Kato & Tatsushi Okuda, 2017. "Market Concentration and Sectoral Inflation under Imperfect Common Knowledge," IMES Discussion Paper Series 17-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2017. "The Formation of Expectations, Inflation and the Phillips Curve," NBER Working Papers 23304, National Bureau of Economic Research, Inc.
    5. Hur, Joonyoung & Kim, Insu, 2017. "Inattentive agents and disagreement about economic activity," Economic Modelling, Elsevier, vol. 63(C), pages 175-190.
    6. Carrillo, Julio A., 2012. "How well does sticky information explain the dynamics of inflation, output, and real wages?," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 830-850.
    7. repec:zbw:rwirep:0255 is not listed on IDEAS
    8. Bredemeier, Christian & Goecke, Henry, 2011. "Sticky Prices vs. Sticky Information – A Cross-Country Study of Inflation Dynamics," Ruhr Economic Papers 255, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    9. Christian Bredemeier & Henry Goecke, 2011. "Sticky Prices vs. Sticky Information – A Cross-Country Study of Inflation Dynamics," Ruhr Economic Papers 0255, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    10. Arslan, M. Murat, 2010. "Relative importance of sticky prices and sticky information in price setting," Economic Modelling, Elsevier, vol. 27(5), pages 1124-1135, September.
    11. Yoshiyuki Nakazono, 2016. "Inflation expectations and monetary policy under disagreements," Bank of Japan Working Paper Series 16-E-1, Bank of Japan.
    12. Goecke, Henry & Luhan, Wolfgang J. & Roos, Michael W.M., 2013. "Rational inattentiveness in a forecasting experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 80-89.
    13. Shin-Ichi Nishiyama, 2011. "How Important are Financial Shocks for the Canadian Business Cycle?," TERG Discussion Papers 276, Graduate School of Economics and Management, Tohoku University.
    14. Benjamin D. Keen & Evan F. Koenig, 2009. "How robust are popular models of nominal frictions?," Working Papers 0903, Federal Reserve Bank of Dallas.
    15. Waldyr D. Areosa, 2016. "What drives inflation expectations in Brazil? Public versus private information," Working Papers Series 418, Central Bank of Brazil, Research Department.
    16. Xu, Yingying & Chang, Hsu-Ling & Lobonţ, Oana-Ramona & Su, Chi-Wei, 2016. "Modeling heterogeneous inflation expectations: empirical evidence from demographic data?," Economic Modelling, Elsevier, vol. 57(C), pages 153-163.
    17. Tomiyuki Kitamura & Tamon Takamura, 2016. "Output Comovement and Inflation Dynamics in a Two-Sector Model with Durable Goods: The Role of Sticky Information and Heterogeneous Factor Markets," Staff Working Papers 16-36, Bank of Canada.
    18. repec:rjr:romjef:v::y:2018:i:1:p:42-62 is not listed on IDEAS
    19. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2015. "Phillips curves with observation and menu costs," EIEF Working Papers Series 1508, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2015.
    20. Torres Torres, Diego José, 2009. "The Dual Stickiness Model and Inflation Dynamics in Spain," MPRA Paper 18031, University Library of Munich, Germany.
    21. Choi, Yoonseok & Kim, Sunghyun, 2016. "Testing an alternative price-setting behavior in the new Keynesian Phillips curve: Extrapolative price-setting mechanism," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 253-265.
    22. M. Murat Arslan, 2013. "Optimal Monetary Policy With The Sticky Information Model Of Price Adjustment: Inflation Or Price-Level Targeting?," Bulletin of Economic Research, Wiley Blackwell, vol. 65, pages 106-129, May.
    23. Volker Hahn & Michal Marencak, 2018. "Price Points and Price Dynamics," Working Paper Series of the Department of Economics, University of Konstanz 2018-01, Department of Economics, University of Konstanz.

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