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

Authors


  • I thank Jon Willis for useful discussions, and Yuriy Gorodnichenko, Daniel Levy, Ricardo Reis, my discussant Bennett McCallum, seminar and conference participants at the American Economic Association Annual Meetings, Society for Computational Economics Conference on Computing in Economics and Finance, Midwest Macro, Missouri Economics Conference, Federal Reserve Bank of Kansas City, and Federal Reserve System Macro Meeting, the editor Kenneth West, and two anonymous referees for comments and suggestions. The views expressed herein are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Abstract

Macroeconomic models with microeconomic foundations allow for comparisons with macro and micro empirical evidence. This paper proposes a model wherein firms: (i) acquire information infrequently, generating sticky information (Mankiw and Reis 2002) and (ii) face menu costs, producing state-dependent sticky prices. I estimate parameters via indirect inference and show that under considerable real rigidity, sticky prices in a sticky-information environment are consistent with micro and macro evidence. Sticky prices not only help match micro data on price changes’ size and durations between adjustments; they also improve the model's fit with the macro data, as embodied in an empirical Phillips curve.

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