A Tale of Two Rigidities: Sticky Prices in a Sticky-Information Environment

Abstract:     
Macroeconomic models with microeconomic foundations face a difficult task: they must be consistent with facts both large and small. This paper proposes a model that combines two strands of the literature on stickiness in order to match both sets of facts. (1) Firms acquire information infrequently, as in Mankiw and Reis (2002), resulting in sticky information. (2) Firms face heterogeneous, fixed menu costs which they must pay to change prices, leading to state-dependent sticky prices at the micro level. I estimate key structural parameters and show that a model of sticky prices in a sticky-information environment is consistent with both micro and macro evidence.

Number of Pages in PDF File: 36

Keywords: sticky prices, sticky information, indirect inference

JEL Classification: E31, E32, E40

working papers series