Dissertation/Thesis Abstract

Macroeconomic Consequences of Sticky Prices and Sticky Information
by Kitamura, Tomiyuki, Ph.D., The Ohio State University, 2008, 170; 10631110
Abstract (Summary)

This dissertation examines macroeconomic consequences of sticky prices and sticky information. It consists of three essays.

The first essay (Chapter 1) develops a simple model combining both sticky prices and sticky information. The duration of the stickiness is fixed. I argue that combining the two types of stickiness creates a very powerful mechanism to generate persistent inflation dynamics. In particular, without assuming empirically implausible degree of price stickiness, the model can capture the hump-shaped behavior of inflation. That is, the inflation rise for some periods after a positive monetary shock and then gradually returns to the steady state level. Also, I show that when the two types of stickiness coexist, the peak of inflation is more delayed compared to the models with only one of the two types of stickiness. Finally, I also show that the results do not depend on the independence of information updating schedule from price setting schedule.

The second essay (Chapter 2) empirically examines a model integrating sticky prices and sticky information. The duration of the stickiness is now random. I find that both rigidities are present in U.S. data. I also show that this dual stickiness model's closest competitor is the hybrid New Keynesian model, which assumes backward-looking behavior of firms. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities, rather than through backward-looking behavior. U.S. data supports the dual stickiness over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, I show that it is quantitatively important to distinguish between the two by simulating a dynamic general equilibrium model under each of the two inflation equations.

The third essay (Chapter 3) investigates optimal monetary policy using models developed in the previous two chapters. Two main results characterize the optimal policy. First, in the presence of cost-push shocks, a simple elastic price target rule is optimal, regardless of the degree of each type of stickiness, and regardless of whether the specification of stickiness is fixed-duration or random-duration. Second, the dynamics under the optimal policy in the model are more persistent than those in the models with either type of stickiness. I also evaluate how important it is for the central bank to distinguish the dual stickiness model from an existing alternative, the hybrid New Keynesian model. The results show that, in the presence of possible error in fulfilling the optimal rule, the welfare loss can be huge when the central bank fails to recognize the dual stickiness model as the true model of the economy.

Indexing (document details)
Advisor: Dupor, William
Commitee: Evans, Paul, McCulloch, J. Hutson
School: The Ohio State University
Department: Economics
School Location: United States -- Ohio
Source: DAI-A 78/11(E), Dissertation Abstracts International
Subjects: Economics
Keywords: Inflation, Monetary policy, Sticky information, Sticky prices
Publication Number: 10631110
ISBN: 978-0-355-01406-8
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