Sticky Information Phillips Curve Research Articles

Inflation expectations and the Phillips curve: an encompassing framework

This paper contrasts empirically four leading models of inflation dynamics – the Accelerationist Phillips curve (APC), New Keynesian Phillips curve (NKPC), Hybrid Phillips curve (HPC) and Sticky Information Phillips curve (SIPC). We employ an encompassing Phillips curve specification that allows us to derive tests for these models within a single framework. Using the generalized method of moments (GMM) estimator, the evidence suggests that the restrictions implied by the NKPC, HPC, and SIPC are rejected for the period after the Real Plan in Brazil. Only the restrictions implied by the APC are not rejected. However, when we construct confidence regions that are robust to weak instruments, it is not possible to reject any of the Phillips curve specifications, including the NKPC.

On the role of dependence in sticky price and sticky information Phillips curve: Modelling and forecasting

Understanding the role of sticky price and sticky information for inflation dynamics is a key issue in economics. The literature has treated the two forms of stickiness as independent. This paper proposes a new dual stickiness Phillips curve based on dependence among the events of setting prices and updating information. Using US data over the period 1947Q1–2020Q1, the new model is scrutinized against a dual stickiness model without dependence, a pure sticky price model, and a pure sticky information model, through in- and out-of-sample analyses. The results show: (i) the new model outperforms the model without dependence in-sample; (ii) the dual stickiness models perform similarly out-of-sample; and (iii) the pure sticky models yield the worst forecasts. The results have some implications for policy makers and practitioners. A policy maker may consider the new model given its performance in- and out-of-sample, while a practitioner may prefer the model without dependence, given its lesser complexity and its competitive forecasting performance.

Great recession and the informational shifts: new evidence from sticky information Phillips curve

ABSTRACTWe utilize the nonlinear least squares (NLLS) and seemingly unrelated regression (SUR) techniques to estimate information stickiness parameter λ for the USA. We find that λ values appeared in a somewhat humped shape or inverted U pattern during the financial crisis. Prior to the financial crisis (1978.Q1-2006.Q4), λ was around 0.3. However, when the sample is extended to include the financial crisis period (1978.Q1-2011.Q4), λ increased to around 0.6. Results imply that during the financial crisis many firms became flexible and efficient and used updated information to set optimal prices.

INFLATION, INFORMATION RIGIDITY, AND THE STICKY INFORMATION PHILLIPS CURVE

The Great Moderation is characterized as a period of stable macroeconomic conditions, especially with regard to inflation. Under the sticky information theory, this environment may provide a few incentives for agents to update information on inflation, thus, producing a new slope of the sticky information Phillips curve. We estimate the degree of information rigidity implied by the sticky information Phillips curve. Using threshold models, we identify two regimes of high and low inflation, finding that each identified regime is associated with a specific degree of information stickiness. This evidence is consistent with agents that update information faster when inflation is higher.

The Sticky Information Phillips Curve: Evidence for Australia

The Sticky Information Phillips curve (SIPC) provides a theoretically appealing alternative to the sticky price New‐Keynesian Phillips curve (NKPC). This paper assesses the empirical performance of the SIPC for Australia. Estimates of the model's structural parameters indicate rejection of the SIPC over the low‐inflation period, but the SIPC fits the data better over a longer sample period including the disinflation of the early 1990s. Overall, though, the NKPC appears to fit the data better than the SIPC. This is partly because forward‐looking inflation dynamics are more important than implied by the SIPC under plausible parameter values.

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Editors’ Introduction

Editors’ Introduction

A Sticky Information Phillips Curve for South Africa

AbstractMankiw and Reis propose the Sticky Information Phillips Curve (SIPC) as an alternative to the standard New Keynesian Phillips Curve to address empirical shortcomings in the latter. A SIPC for South Africa is estimated, and we find estimates of information updating probability between 0.69 and 0.81, somewhat higher than suggested by methods using micro‐evidence. Because the estimation requires data on expectations of current period inflation and output gap conditional on sequences of earlier period information sets, we provide a detailed analysis of the impact on our estimates of alternative proxies available in South Africa.

Sticky information and inflation persistence: evidence from the U.S. data

This paper analyzes the relationship between sticky information and inflation persistence by implementing a novel approach to estimate the Sticky Information Phillips Curve (SIPC). The degree of sticky information is estimated using a GMM estimator that matches the covariance between inflation and the shocks that affect firms’ pricing decisions. Although the SIPC contains an infinite number of terms, the theoretical covariances derived from the model have finite dimensions, thus allowing the estimation of the structural parameters without any truncation of the original model. This work shows that sticky information is significantly different if the model is estimated by matching inflation persistence or inflation variance. Previous empirical literature found that the SIPC model does not provide an accurate representation of the US postwar inflation. This paper qualifies such a finding by demonstrating that the SIPC is able to match the inflation persistence only at the cost of mismatching the inflation variance.

Estimating Information Rigidity Using Firms' Survey Data

The slope of the sticky information Phillips curve proposed by Mankiw and Reis (2002) is based on the degree of information rigidity on the part of firms. Carroll (2003) uses an epidemiology model of expectations and finds evidence for the U.S. of a one-year lag in the transmission of information from professional forecasters to households. Using financial institutions’ and firms’ survey data from Peru and the model proposed by Carroll, I estimate the degree of information rigidity for the Peruvian economy. This paper also considers heterogeneous responses and explores the cross-sectional dimension of these survey forecasts. I find that the degree of information stickiness ranges between one and two quarters, a result that is robust to different specifications.

Thought experimentation and the Phillips curve

This paper offers the rationale for presenting a particular type of Phillips curve and develops the dynamic behavior of an economy where such a Phillips curve relation is observed. The specific kind of relation that is explored has similarities with the sticky-information Phillips curve of the Mankiw–Reis framework. Nevertheless, it adds an important dimension: firms need to form expectations about current events on past time periods not because of infrequent optimal updating of information but because producers want to evaluate the possibility of taking advantage of information deficiencies on the consumers’ side. A positive probability of ‘fooling’ consumers with a price above the one imposed by market conditions re-shapes the dynamic relation between the inflation rate and the output gap.

Sticky Information and Determinacy

The infinite-dimensional sticky-information Phillips curve is cast as a finite-dimensional timevarying system of difference equations in order to directly assess determinacy in the model with demand given by the forward-looking IS equation and monetary policy by an interest rate rule. An equivalence to the model without lagged expectations holds (albeit tenuously) for the particular specification and a common truncation method produces spurious determinacy.

ROBUST POLICIES IN A STICKY INFORMATION ECONOMY

This paper analyzes the behavior of a central bank under strong (“Knightian”) uncertainty when the short-run trade-off between output and inflation is represented by the sticky information Phillips curve proposed by Mankiw and Reis [Quarterly Journal of Economics 117(4), 1295–1328 (2002)]. By solving the robust control problem analytically, we show why model uncertainty does not affect the optimal monetary policy response to demand and productivity shocks, whereas it causes a stronger reaction of the monetary policy instrument to a cost-push (i.e., markup) shock. Differently from what occurs in sticky price models, the antiattenuation effect can result in a degree of price level stabilization that is greater or less than that experienced in the rational expectation model, depending on the central bank's degree of conservatism. These results dramatically affect the rationale for delegating monetary policy to a central banker more conservative than the society.

Testing the Sticky Information Phillips Curve

I consider the empirical evidence for the sticky information model relative to the basic sticky price model, conditional on historical measures of inflation forecasts. The estimated structural parameters are inconsistent with an underlying sticky information model and the sticky information Phillips curve is statistically dominated by the new Keynesian Phillips curve. I find that the poor performance of the sticky information approach is driven by two key elements. First, the sticky information model underestimates inflation in the 1970s and overestimates inflation since the 1980s. Second, predicted inflation from the sticky information model is excessively smooth.

Sticky Information Phillips Curves: European Evidence

We estimate the Sticky Information Phillips Curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany, and the United Kingdom are updated about once a year, while in Italy, about once each 6 months.

Sticky Information Phillips Curves: European Evidence

We estimate the sticky information Phillips curve model of Mankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.

Robust Control in a Sticky Information Economy

This paper analyzes the behavior of a central bank under strong (Knightian) uncertainty when the short run trade-off between output and inflation is represented by the Sticky Information Phillips Curve recently proposed by Mankiw and Reis (2002). By solving the robust control problem analytically, this paper elucidates the economic mechanisms at play in a sticky information economy and shows how and why the robust monetary policy in this economy differs from the optimal one identi fied by Ball, Mankiw and Reis (2005).

Testing the Sticky Information Phillips Curve

I consider the empirical evidence for the sticky information model of Mankiw and Reis (2002) relative to the basic sticky price model, conditional on historical measures of inflation forecasts. Overall, the evidence is unfavorable to the sticky information model of price-setting: the estimated structural parameters are inconsistent with an underlying sticky information model and the sticky-information Phillips Curve is statistically dominated by the New Keynesian Phillips Curve. I find that the poor performance of the sticky information approach is driven by two key elements. First, predicted inflation in the sticky information model places substantial weight on old forecasts of inflation. Because these consistently underestimate inflation in the 1970s and overestimate inflation since the 1980s, particularly at long forecast horizons, predicted inflation from the sticky information model inherits these patterns. Second, predicted inflation from the sticky information model is excessively smooth.

Partisan Theory and the New Keynesian and Sticky-Information Phillips Curves

This paper attempts two things: First, to modernize partisan theory by merging the idea of partisan differences in macroeconomic preferences with recent, optimizing models of aggregate supply that account for sluggish nominal adjustment. This aids in resolving some puzzles posed by the current state of partisan theory research. Second, to exploit partisan patterns for a comparison of the empirical performance of the new Keynesian Phillips curve with that of a recent challenger, the sticky-information Phillips curve. It turns out that the sticky-information Phillips curve clearly outperforms its better established rival: in accounting for econometric estimates of partisan patterns in OECD countries, and in tracking post-war experience in the US. [http://www.vwa.unisg.ch/RePEc/usg/dp2005/DP-25_Ga.pdf Download full text]

Estimates of the Sticky-Information Phillips Curve for the United States

Mankiw and Reis (2002) have proposed a 'sticky-information'-based Phillips curve (SIPC) to address some of the concerns with the 'sticky-price'-based new Keynesian Phillips curve. In this paper, we present a methodology to empirically implement the SIPC and estimate its key structural parameter- the degree of information stickiness-for the United States.Using this methodology, we estimate average durations of information stickiness that range from three quarters (on the low side) to over seven quarters (on the high side).