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Wednesday, February 15, 2006

Pervasive Stickiness

Mankiw and Reis on pervasive sticky information models:

Pervasive Stickiness (Expanded Version), by N. Gregory Mankiw and Ricardo Reis, NBER WP 12024, February 2006: Abstract This paper explores a macroeconomic model of the business cycle in which stickiness of information is pervasive. We start from a familiar benchmark classical model and add to it the assumption that there is sticky information on the part of consumers, workers, and firms. We evaluate the model against three key facts that describe short-run fluctuations: the acceleration phenomenon, the smoothness of real wages, and the gradual response of real variables to shocks. We find that pervasive stickiness is required to fit the facts. We conclude that models based on stickiness of information offer the promise of fitting the facts on business cycles while adding only one new plausible ingredient to the classical benchmark.

In the conclusion, Mankiw and Reis explain why this is an important alternative to theoretical formulations incorporating wage stickiness, price stickiness, habit formation in consumption, adjustment costs, and other rigidities to explain U.S. macroeconomic data:

...Because monetary policy seems to have real effects, research has recently focused on a hybrid formulation of Calvo’s sticky price model in which either some price-setters are naive or all index their prices to past inflation. Because real wages are smooth in the data, research has looked into models with adjustment costs in using inputs, norms in labor bargaining, or direct real wage rigidities. Because consumption and output growth are positively serially correlated, research has considered modelling representative agents that form habits. In a prescient article, Christopher A. Sims (1998) noted that across all dimensions, to match the data, the classical model needed “stickiness.” It has become increasingly clear that stickiness is not just needed but must also be pervasive. Fixing the classical model with a series of isolated patches, however, runs the risk of losing the discipline of having a model altogether. Inattentiveness and stickiness of information have the virtue of adding only one new plausible ingredient to the classical benchmark. The results reported here suggest that such a model moves promisingly in the direction of fitting the facts on business cycles.

    Posted by on Wednesday, February 15, 2006 at 12:11 AM in Academic Papers, Economics, Macroeconomics | Permalink  TrackBack (0)  Comments (1)

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