Working Paper

Sticky information and sticky prices

Abstract: In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. \"Sticky information\" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information.

Keywords: Prices;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2006

Number: RWP 06-13