Sticky information and sticky prices |
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Institution: | 1. Department of Economics, Stanford University and NBER, USA;2. Research Department, Federal Reserve Bank of Kansas City, 925 Grand Blvd., Kansas City, MO 64198, USA |
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Abstract: | In the U.S. and Europe, prices change at least once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. “Sticky information” models, as posited by Mankiw and Reis 2002. Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295–1328], Sims 2003. Implications of rational inattention. Journal of Monetary Economics 50(3), 665–690], and Woodford 2003. Princeton University Press: Princeton, NJ], can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters update information on macro shocks less frequently than information on micro shocks. We then examine price changes in the micro data underlying the U.S. CPI. Empirical price changes react to old information, just as sticky information models predict. |
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