Sticky information and inflation persistence: evidence from the U.S. data

Benedetto Molinari

Empirical Economics, 2014, vol. 46, issue 3, 903-935

Abstract: This paper analyzes the relationship between sticky information and inflation persistence by implementing a novel approach to estimate the Sticky Information Phillips Curve (SIPC). The degree of sticky information is estimated using a GMM estimator that matches the covariance between inflation and the shocks that affect firms’ pricing decisions. Although the SIPC contains an infinite number of terms, the theoretical covariances derived from the model have finite dimensions, thus allowing the estimation of the structural parameters without any truncation of the original model. This work shows that sticky information is significantly different if the model is estimated by matching inflation persistence or inflation variance. Previous empirical literature found that the SIPC model does not provide an accurate representation of the US postwar inflation. This paper qualifies such a finding by demonstrating that the SIPC is able to match the inflation persistence only at the cost of mismatching the inflation variance. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Sticky Information Phillips Curve; Inflation persistence; GMM; Two-stage estimation (search for similar items in EconPapers)
Date: 2014
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Working Paper: Sticky Information and Inflation Persistence: Evidence from U.S. Data (2010)
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DOI: 10.1007/s00181-013-0700-y

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