Endogenous Price Stickiness and Business Cycle Persistence
Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-23
Posted: 21 Oct 1996
Date Written: August 5, 1996
Both imperfect information and sticky prices allow nominal shocks to act as business cycle impulses, but only sticky prices propagate the real effects of nominal shocks. A simple model of imperfect information and sticky prices developed herein indicates that high rates of inflation lead to less price stickiness and, hence, less persistent output fluctuations. Estimation of the model, as well as simple autocorrelations of real output, indicate that indeed output fluctuations are less persistent in high inflation economies. These results lend little support to models in which output persistence is explained through persistent real shocks, capital accumulation or adjustment costs.
JEL Classification: E32, E31
Suggested Citation: Suggested Citation