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How Well Does Sticky Information Explain the Dynamics of Inflation, Output, and Real Wages?

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  • J. A. CARRILLO

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This paper finds that a model with pervasive information frictions is less successful than a standard model featuring nominal rigidities, inflation indexation, and habit persistence in generating the dynamics triggered by technology shocks, as estimated by a vector autoregression using key U.S. macroeconomic time series. The real wage responses after a permanent increase in productivity tilt the balance clearly in favor of the standard model. The sticky information model overestimates the speed of adjustment in the real wage and is hence particularly unsuccessful in replicating its inertial response, whereas the standard model relies on inflation indexation in wage-setting to achieve a better fit. The two models are, however, statistically equivalent in mimicking the responses of output, inflation, the real wage and the federal funds rate after a shock in monetary policy.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 11/724.

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Length: 32 pages
Date of creation: Jun 2011
Handle: RePEc:rug:rugwps:11/724
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