Testing the Sticky Information Phillips Curve

Olivier Coibion

No 61, Working Papers from Department of Economics, College of William and Mary

Abstract: I consider the empirical evidence for the sticky information model of Mankiw and Reis (2002) relative to the basic sticky price model, conditional on historical measures of inflation forecasts. Overall, the evidence is unfavorable to the sticky information model of price-setting: the estimated structural parameters are inconsistent with an underlying sticky information model and the sticky-information Phillips Curve is statistically dominated by the New Keynesian Phillips Curve. I find that the poor performance of the sticky information approach is driven by two key elements. First, predicted inflation in the sticky information model places substantial weight on old forecasts of inflation. Because these consistently underestimate inflation in the 1970s and overestimate inflation since the 1980s, particularly at long forecast horizons, predicted inflation from the sticky information model inherits these patterns. Second, predicted inflation from the sticky information model is excessively smooth.

Keywords: Sticky Information; Expectations; Inflation (search for similar items in EconPapers)
JEL-codes: E30 E37 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2007-10-21
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (10)

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Journal Article: Testing the Sticky Information Phillips Curve (2010)
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