B USINESS C YCLE DYNAMICS UNDER S TICKY I NFORMATION

Fabio Verona
Bank of Finland, Monetary Policy and Research Department, Research Unit
fabio.verona@bof.fi

O BJECTIVE :
analyze how and to what extent sticky information (or inattentiveness) alone shapes business cycle dynamics.

T HE M ODEL AND E STIMATION M ETHODOLOGY:

Verona (2014a) sticky-information general equilibrium model
estimated using a simulated method of moments approach.

F INDINGS :
the model with pervasive inattentiveness matches several business cycle moments
better than an otherwise identical model with only a subset of these frictions.
These findings reinforce the need for pervasive stickiness to mimic the inertia found in macroeconomic data.

ASSA meeting, Boston, January 3-5 2015

 S TICKY ACTIONS VERSUS S TICKY I NFORMATION

aa cccddddddddd

ASSA meeting, Boston, January 3-5 2015


T HE DSGE M ODEL WITH S TICKY I NFORMATION

Mankiw and Reis (2006) proposed the first DSGE model that features sticky information only. See also Mankiw and Reis (2007), Reis (2009a,b) and Verona (2013).

ASSA meeting, Boston, January 3-5 2015

 T HE S TICKY -I NFORMATION E QUATIONS

 
X 1 F IN r
kt = (1 ) Et yt+1 kt rt (1)
=0
1 1 (r + ) (1 )

 
X (wt pt) + (1 ) yt at
pt = (1 ) Et pt + (2)
=0
+ v (1 )

X n
ct = (1 ) Et (ct Rt) (3)
=0

 
X lt n
wt = (1 ) Et pt + (wt pt) + + (ct Rt) (4)
=0
+ + +

a fraction of capital-investing firms, of price-setting firms, of consumers and

of workers obtain new information and make their optimal plans every quarter
ASSA meeting, Boston, January 3-5 2015
 ,
B USINESS C YCLE M OMENTS - M ODELS VERSUS US DATA
a

standard deviation autocorrelation correlation

(ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt) (ht , yt)
y i/y c/y h/y yt it ct ht (it , yt) (ct , yt) (ht , yt)
a

data
data (1966 Q1 - 2004 Q4) 1.58 3.22 0.76 0.81 0.87 0.92 0.86 0.89 0.89 0.89 0.90

data
model

( = 0.08, = 0.28, 1.58 3.87 0.96 2.02 0.82 0.66 0.84 0.69 0.75 0.88 0.84

= 0.86, = 0.34)
model
model ( = 1) 1.58 3.38 0.21 0.97 0.08 0.01 0.74 0.00 0.94 -0.08 0.96
model
model
model ( = 1) 1.58 6.67 1.22 0.82 0.72 0.41 0.88 0.50 0.88 0.89 0.83
model
model
model ( = 1) 1.58 3.87 0.96 2.02 0.82 0.66 0.84 0.69 0.75 0.88 0.84
model
model
model ( = 1) 1.58 2.70 0.82 1.78 0.70 0.58 0.64 0.53 0.71 0.91 0.90
model

All simulations were conducted with Dynare version 4.3.0 considering 32 lags in equations (1)-(4). Each models moment was calculated by averaging it over 1000 simulations each 156-periods

long (as the sample in the data), after applying the HP-filter (with smoothing parameter equal to 1600). The standard deviations of the shocks (technology and monetary policy) were chosen so that

the model reproduces the volatility of output in the data.

The computations were parallelized using the Techila technology (www.techilatechnologies.com/).

All data were taken from the FRED database. The moments were computed after applying the HP-filter (with smoothing parameter equal to 1600) to the natural logarithm of each series.

ASSA meeting, Boston, January 3-5 2015

 O NGOING AND F UTURE W ORKS

estimate the model using Bayesian methods

horse race: sticky-actions (e.g. Smets and Wouters, 2003) versus sticky-information models

R EFERENCES
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1-45.

Mankiw, N. Gregory, and Ricardo Reis. (2002) Sticky information versus sticky prices: a proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics, 117(4), 1295-1328.

Mankiw, N. Gregory, and Ricardo Reis. (2006) Pervasive stickiness. American Economic Review, 96(2), 164- 169.

Mankiw, N. Gregory, and Ricardo Reis. (2007) Sticky information in general equilibrium. Journal of the European Economic Association, 5(2-3), 603-613.

Reis, Ricardo. (2006a) Inattentive consumers. Journal of Monetary Economics, 53(8), 1761-1800.

Reis, Ricardo. (2006b) Inattentive producers. Review of Economic Studies, 73(3), 793-821.

Reis, Ricardo. (2009a) Optimal monetary policy rules in an estimated sticky-information model. American Economic Journal: Macroeconomics, 1(2), 1-28.

Reis, Ricardo. (2009b) A sticky-information general equilibrium model for policy analysis. In Monetary Policy under Uncertainty and Learning, edited by Klaus Schmidt-Heubel and Carl Walsh. Central Bank of Chile: Santiago.

Smets, Frank, and Raf Wouters. (2003) An estimated stochastic dynamic general equilibrium model of the Euro area. Journal of the European Economic Association, 1(5), 1123-1175.

Verona, Fabio. (2013) Lumpy investment in sticky information general equilibrium. Bank of Finland Research Discussion Papers 16/2013.

Verona, Fabio. (2014a) Pervasive inattentiveness. Economics Letters, 125(2), 287-290.

Verona, Fabio. (2014b) Investment dynamics with information costs. Journal of Money, Credit and Banking, 46(8), 1627-1656.

ASSA meeting, Boston, January 3-5 2015