The Sticky Information Macro Model: Beyond Perfect Foresight

Orlando Gomes

Studies in Nonlinear Dynamics & Econometrics, 2009, vol. 14, issue 1, 37

Abstract: Sticky information monetary models have been used in the macroeconomic literature to explain some of the observed features regarding inflation dynamics. In this paper, we explore the consequences of relaxing the rational expectations assumption usually taken in this type of model; in particular, by considering expectations formed through adaptive learning, it is possible to arrive to results other than the trivial convergence to a fixed point long-term equilibrium. The results involve the possibility of endogenous cyclical motion (periodic and a-periodic), which emerges essentially in scenarios of hyperinflation. In low inflation settings, the introduction of learning implies a less severe impact of monetary shocks that, nevertheless, tend to last for additional time periods relative to the pure perfect foresight setup.

Date: 2009
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DOI: 10.2202/1558-3708.1716

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