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STICKY PRICE AND STICKY INFORMATION PRICE‐SETTING MODELS: WHAT IS THE DIFFERENCE?
Author(s) -
KEEN BENJAMIN D.
Publication year - 2007
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2007.00045.x
Subject(s) - economics , monetary policy , inflation (cosmology) , shock (circulatory) , monetary economics , inflation targeting , econometrics , keynesian economics , macroeconomics , physics , medicine , theoretical physics
Using a partial equilibrium framework, Mankiw and Reis show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock, whereas a sticky price model cannot. Our study demonstrates that the finding is sensitive to their model’s parameterization. To determine a plausible parameterization, we specify a general equilibrium model with sticky information. In that model, we find that inflation peaks only one period after a monetary disturbance. A sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth, whereas inflation peaks immediately when the policy instrument is the nominal interest rate. ( JEL E31, E32, E52)