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

  • Edward S. Knotek II

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

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 06-15.

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Date of creation: 2006
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Handle: RePEc:fip:fedkrw:rwp06-15
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