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How well does sticky information explain inflation and output inertia?

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  • Carrillo, J.A.

    (Macro, International & Labour Economics)

Abstract
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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Suggested Citation

  • Carrillo, J.A., 2010. "How well does sticky information explain inflation and output inertia?," Research Memorandum 018, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    • Handle: RePEc:unm:umamet:2010018
    DOI: 10.26481/umamet.2010018
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    5. Yingying Xu & Zhixin Liu & Zichao Jia & Chi-Wei Su, 2017. "Is time-variant information stickiness state-dependent?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(3), pages 169-187, December.
    6. Orlando Gomes, 2012. "Transitional Dynamics in Sticky-Information General Equilibrium Models," Computational Economics, Springer;Society for Computational Economics, vol. 39(4), pages 387-407, April.
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    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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