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A Quantitative Comparison Of Sticky-Price And Sticky-Information Models Of Price Setting

  • Michael Kiley

This paper presents baseline sticky-price and sticky-information models of price-setting, and modifies each to incorporate some “rule-of-thumb†price-setters that index to inflation over recent periods. These models are estimated for the United States via maximum-likelihood techniques. While the baseline sticky-information model generates a bit more endogenous inertia in inflation than the baseline sticky-price model, its overall fit is worse. The results point toward substantial gains in terms of fit for hybrid models with indexation that smoothes through quarterly volatility in inflation and clarify the relative performance of recent sticky-information models proposed in the literature

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 183.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:183
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  1. Lawrence Slifman & Carol Corrado, 1999. "Decomposition of Productivity and Unit Costs," American Economic Review, American Economic Association, vol. 89(2), pages 328-332, May.
  2. Jean-Philippe Laforte, 2005. "Pricing models: a Bayesian DSGE approach to the U.S. economy," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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  4. Fuhrer, Jeffrey, 2006. "Intrinsic and Inherited Inflation Persistence," MPRA Paper 805, University Library of Munich, Germany.
  5. Rudd, Jeremy & Whelan, Karl, 2005. "Modelling Inflation Dynamics: A Critical Review of Recent Research," Research Technical Papers 7/RT/05, Central Bank of Ireland.
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  9. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February.
  10. Jordi Gali & Mark Gertler & David Lopez-Salido, 2005. "Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve," NBER Working Papers 11788, National Bureau of Economic Research, Inc.
  11. Rudd, Jeremy & Whelan, Karl, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics," Research Technical Papers 5/RT/03, Central Bank of Ireland.
  12. Christopher D Carroll, 2001. "The Epidemiology of Macroeconomic Expectations," Economics Working Paper Archive 462, The Johns Hopkins University,Department of Economics.
  13. Rudd, Jeremy & Whelan, Karl, 2005. "Does Labor's Share Drive Inflation?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 297-312, April.
  14. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  15. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
  16. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
  17. Leamer, Edward E., 1983. "Model choice and specification analysis," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 5, pages 285-330 Elsevier.
  18. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  19. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
  20. Michael Kumhof & Douglas Laxton, 2005. "A Rational Expectations Model of Optimal Inflation Inertia," Computing in Economics and Finance 2005 429, Society for Computational Economics.
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