Sticky Information and Sticky Prices

Federal Reserve Bank of Kansas City Working Paper No. 06-13

40 Pages Posted: 28 Dec 2006

See all articles by Jonathan L. Willis

Jonathan L. Willis

Federal Reserve Bank of Kansas City

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2006

Abstract

In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information.

Keywords: sticky information, state dependent pricing

JEL Classification: D8, E3, L16

Suggested Citation

Willis, Jonathan and Klenow, Peter J., Sticky Information and Sticky Prices (December 2006). Available at SSRN: https://ssrn.com/abstract=953950 or http://dx.doi.org/10.2139/ssrn.953950

Jonathan Willis (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2852 (Phone)
816-881-2199 (Fax)

Peter J. Klenow

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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