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A tale of two rigidities: sticky prices in a sticky-information environment

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  • Edward S. Knotek

Abstract

Macroeconomic models with microeconomic foundations face a difficult task: they must be consistent with facts both large and small. This paper proposes a model that combines two strands of the literature on stickiness in order to match both sets of facts. (1) Firms acquire information infrequently, as in Mankiw and Reis (2002), resulting in sticky information. (2) Firms face heterogeneous, fixed menu costs which they must pay to change prices, leading to state-dependent sticky prices at the micro level. I estimate key structural parameters and show that a model of sticky prices in a sticky-information environment is consistent with both micro and macro evidence

Suggested Citation

  • Edward S. Knotek, 2006. "A tale of two rigidities: sticky prices in a sticky-information environment," Research Working Paper RWP 06-15, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp06-15
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    22. Bruchez, Pierre-Alain, 2007. "A Hybrid Sticky-Price and Sticky-Information Model," MPRA Paper 3540, University Library of Munich, Germany.
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    26. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
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    Cited by:

    1. Rosen Valchev & Nicolas Vincent & Cosmin Ilut, 2014. "Paralyzed by Fear: Rigid and Discrete Pricing under Demand Uncertainty," 2014 Meeting Papers 716, Society for Economic Dynamics.
    2. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
    3. Daniel Levy & Dongwon Lee & Haipeng (Allan) Chen & Robert J. Kauffman & Mark Bergen, 2011. "Price Points and Price Rigidity," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1417-1431, November.
    4. 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.
    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. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 2008 - 2015 380, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric price adjustment in the small," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 728-737, May.
    8. repec:hrv:faseco:33907956 is not listed on IDEAS
    9. Demery, David, 2012. "State-dependent pricing and the non-neutrality of money," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 933-944.
    10. Kim, Insu & Kim, Young Se, 2019. "Inattentive agents and inflation forecast error dynamics: A Bayesian DSGE approach," Journal of Macroeconomics, Elsevier, vol. 62(C).
    11. Cosmin Ilut & Rosen Valchev & Nicolas Vincent, 2020. "Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty," Econometrica, Econometric Society, vol. 88(5), pages 1899-1938, September.
    12. Edward S. Knotek, 2010. "The roles of price points and menu costs in price rigidity," Research Working Paper RWP 10-18, Federal Reserve Bank of Kansas City.
    13. 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.
    14. Acharya, Sushant, 2010. "Costly Information, Planning Complementarity and the New Keynesian Phillips Curve," MPRA Paper 22514, University Library of Munich, Germany.
    15. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    16. Stephen J. Terry, 2017. "Alternative Methods for Solving Heterogeneous Firm Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1081-1111, September.
    17. Tomiyuki Kitamura & Masaki Tanaka, 2019. "Firms' Inflation Expectations under Rational Inattention and Sticky Information: An Analysis with a Small-Scale Macroeconomic Model," Bank of Japan Working Paper Series 19-E-16, Bank of Japan.
    18. 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.
    19. Klenow, Peter J. & Willis, Jonathan L., 2007. "Sticky information and sticky prices," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 79-99, September.
    20. Gomes, Orlando, 2012. "Thought experimentation and the Phillips curve," Research in Economics, Elsevier, vol. 66(1), pages 45-64.
    21. repec:rim:rimwps:04-07 is not listed on IDEAS
    22. Vivian Malta & Rene Garcia & Carlos Carvalho & Marco Bonomo, 2015. "Persistent Monetary Non-neutrality in an Estimated Model with Menu Costs and Partially Costly Information," 2015 Meeting Papers 1339, Society for Economic Dynamics.
    23. Rene Garcia & Carlos Carvalho & Marco Bonomo, 2013. "Time- and State-Dependent Pricing: A Unified Framework," 2013 Meeting Papers 759, Society for Economic Dynamics.
    24. Edward S. Knotek & Stephen J. Terry, 2008. "Alternative methods of solving state-dependent pricing models," Research Working Paper RWP 08-10, Federal Reserve Bank of Kansas City.

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