How Well Does Sticky Information Explain the Dynamics of Inflation, Output, and Real Wages?

Julio Carrillo

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

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.

Keywords: Sticky prices; sticky information; inflation indexation; monetary and technology shocks (search for similar items in EconPapers)
JEL-codes: C15 E31 E52 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://wps-feb.ugent.be/Papers/wp_11_724.pdf (application/pdf)

Related works:
Journal Article: How well does sticky information explain the dynamics of inflation, output, and real wages? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:11/724

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