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Endogenous price stickiness and business cycle persistence

  • Michael T. Kiley

Both imperfect information and sticky prices allow nominal shocks to act as business cycle impulses, but only sticky prices propagate the real effects of nominal shocks. A simple model of imperfect information and sticky prices developed herein indicates that high rates of inflation lead to less price stickiness, and hence less persistent output fluctuations. Estimation of the model, as well as simple autocorrelations of real output, indicate that indeed output fluctuations are less persistent in high inflation economies. These results lend little support to models in which output persistence is explained through persistent real shocks, capital accumulation, or adjustment costs.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-23.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-23
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  1. David Romer, 1989. "Staggered Price Setting with Endogenous Frequency of Adjustment," NBER Working Papers 3134, National Bureau of Economic Research, Inc.
  2. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  3. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  4. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  5. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
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  7. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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  10. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Rigidities and Aggregate Price Dynamics," NBER Working Papers 4162, National Bureau of Economic Research, Inc.
  11. Julio J. Rotemberg & Michael Woodford, 1994. "Is the Business Cycles a Necessary Consequence of Stochastic Growth?," NBER Working Papers 4650, National Bureau of Economic Research, Inc.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  13. Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December.
  14. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  15. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  16. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  17. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Price Rigidities, Asymmetries, and Output Fluctuations," NBER Working Papers 4091, National Bureau of Economic Research, Inc.
  18. DeFina, Robert H, 1991. "International Evidence on a New Keynesian Theory of the Output-Inflation Trade-Off," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 410-22, August.
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