Abstract

Vector auto-regressions applied to U.S. data find that inflation and output experience persistent and hump-shaped responses to unanticipated monetary shocks. One monetary model that can generate these responses employs sticky information. Under sticky information, a firm may costlessly change its nominal price every period; however, the firm can only occasionally update the information upon which it bases decisions. We show that this result hinges critically on the assumption that each firm receives information updates randomly. If, on the other hand, each firm updates its information at infrequent but fixed intervals: (a) the output response is not persistent and only weakly hump-shaped under one-year price contracts; (b) the inflation response suffers diminished persistence and a reduced hump-shape; (c) the inflation response remains unrealistic under longer durations.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 1143-1152
Launched on MUSE
2006-01-26
Open Access
No
Archive Status
Archived 2007
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