A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting

41 Pages Posted: 14 Dec 2006

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: November 2006

Abstract

I estimate sticky-price and sticky-information models of price setting for the United States via maximum-likelihood techniques, reaching several conclusions. First, the sticky-price model fits best, and captures inflation dynamics as well as reduced-form equations once hybrid-behavior is allowed. Second, the importance of hybrid behavior in sticky-price models is potentially consistent with a role for some information imperfections, such as sticky information, as a complement to nominal price rigidities. Finally, the favorable results herein for the hybrid sticky-price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models, as this literature has largely ignored fit in evaluating such models. Many previous studies have focused on ancillary issues, such as the standard errors associated with certain parameters or Granger-causality tests that may not provide much information about sticky-price models.

Keywords: Phillips curve, new-keynesian model, inflation persistence

JEL Classification: E3

Suggested Citation

Kiley, Michael T., A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting (November 2006). FEDS Working Paper No. 2006-45. Available at SSRN: https://ssrn.com/abstract=951416 or http://dx.doi.org/10.2139/ssrn.951416

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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