Sticky Information Research Articles

Information Stickiness and Monetary Policy on the Great Moderation

Information Stickiness and Monetary Policy on the Great Moderation

Monetary Policy Surprises and Inflation Expectation Dispersion

Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.

Deviating from full rationality but not from theoretical consistency: The behavior of inflation expectations in Brazil

The aim of this paper is to investigate whether inflation expectations in Brazil have characteristics and statistical properties that can be correlated (possibly in a causal way) with observed variables of interest and expectations about them. Our analysis covers the period from December 2001 to August 2018. We test the hypothesis of rational expectations in the formation of inflation expectations by the respondents of the official survey conducted by the Central Bank of Brazil, examining the behavior of their forecast errors. As these errors are biased and can be predicted, we reject the hypothesis of full rationality. We also test models of noisy and sticky information, and we cannot conclude that the deviations from full rationality can be explained by information rigidity. Additionally, with a vector error correction model, we find evidence that the expectations about the related macroeconomic variables respond to each other as predicted by a theoretically-grounded macroeconomic model. Therefore, inflation expectations in Brazil are to an important extent consistent with more general expectations about the future performance of the economy.

Measuring the slowly evolving trend in US inflation with professional forecasts

SummaryMuch research studies US inflation history with a trend‐cycle model with unobserved components, where the trend may be viewed as the Fed's evolving inflation target or long‐horizon expected inflation. We provide a novel way to measure the slowly evolving trend and the cycle (or inflation gap), by combining inflation predictions from the Survey of Professional Forecasters (SPF) with realized inflation. The SPF forecasts may be treated either as rational expectations (RE) or updating according to a sticky information (SI) law of motion. We estimate RE and SI state‐space models with stochastic volatility on samples of consumer price index and gross national product/gross domestic product deflator inflation and the associated SPF inflation predictions using a particle Metropolis–Markov chain Monte Carlo sampler. The trend converges to 2% and its volatility declines over time—two tendencies largely complete by the late 1990s.

The Impact of the Innovative Knowledge of Customers on Their Recommendation Intentions.

This article provides a systematic way to examine the impact of the innovative knowledge of customers on their recommendation intentions from firm design perspective and investigates the moderating effects of guidance methods and design materials provided combining different aspects of cognitive fit, media richness, and sticky information theories. We use the EQXIU platform, conduct two experiments, and find that there are significant differences between the novice customers and expert customers in their recommendation intentions. Experts are more prone to no-template materials, whereas novices are more inclined to use modules and templates. Therefore, to inspire innovation, firms should offer personalized opportunities based on customers’ knowledge levels to enhance their experience. Firms should also design the innovative activities taking into consideration the knowledge levels of their customers. At last, limitations of this study and directions for further research are discussed.

How sticky information and members attitudes affects the co-innovate carbon emission reduction?

There is an inevitable trend in carbon emission reduction and various contracts designed to promote environmental products in the supply chain. The aim is to analyze the effects of sticky information and members’ attitudes on co-innovate decisions toward carbon emission reduction in the supply chain. Six strategies proposed on the mixture of three types of members’ attitudes towards co-innovation and two types of strategy style, and a penalty contract designed to tackle these issues.

Inflation and professional forecast dynamics: An evaluation of stickiness, persistence, and volatility

This paper studies the joint dynamics of U.S. inflation and a term structure of average inflation predictions taken from the Survey of Professional Forecasters (SPF). We estimate these joint dynamics by combining an unobserved components (UC) model of inflation and a sticky‐information forecast mechanism. The UC model decomposes inflation into trend and gap components, and innovations to trend and gap inflation are affected by stochastic volatility. A novelty of our model is to allow for time‐variation in inflation‐gap persistence as well as in the frequency of forecast updating under sticky information. The model is estimated with sequential Monte Carlo methods that include a particle learning filter and a Rao–Blackwellized particle smoother. Based on data from 1968 Q4 to 2018 Q3, estimates show that (i) longer horizon average SPF inflation predictions inform estimates of trend inflation; (ii) inflation gap persistence is countercyclical before the Volcker disinflation and acyclical afterwards; (iii) by 1990 sticky‐information inflation forecast updating is less frequent than it was earlier in the sample; and (iv) the drop in the frequency of the sticky‐information forecast updating occurs at the same time persistent shocks become less important for explaining movements in inflation. Our findings support the view that stickiness in survey forecasts is not invariant to the inflation process.

How to Model Forward Guidance and Address a Larger Puzzle

Forward guidance during the zero lower bound period is typically modeled as news that alters the expected liftoff date of the policy rate, assuming that agents do not expect a policy rate hike in near future. Using U.S. high-frequency data, I empirically reject this assumption and show that guidance affects the entire term structure of expected rates. Introducing this estimated guidance shock in a standard New Keynesian model substantially magnifies the forward guidance puzzle, i.e. the excessive model-implied response to guidance. I show that allowing agents to update their macroeconomic expectations in the pessimistic direction following a guidance easing explains this larger puzzle per se, unlike the common approach of introducing a discount parameter due to a deviation from a baseline assumption. In addition, I find that the puzzle can also be explained by sticky information general equilibrium models.

Inflation uncertainty and inflation expectations: Micro-level evidence from the eurozone

This paper investigates the evolution of consumers’ inflation expectation. Using Eurobarometer survey data, we estimate models of the probability and the size of “forecast failure” of inflation forecasts. We document that higher inflation uncertainty, higher lagged inflation rates and increased inflation news volume reduce both the probability of failing to predict the correct inflation trajectory and the probability of making large forecast errors – in line with models featuring rational forecasting and sticky information. Furthermore, when the volatility of shocks to inflation increases, individuals tend to make incorrect inflation forecasts as well as large forecast ‘mistakes’, consistent with models featuring asymmetric loss functions. We also document heterogeneity in expectation formation related to demographic characteristics of respondents such as age, gender or education.

HETEROGENEITY IN WAGE SETTING BEHAVIOR IN A NEW-KEYNESIAN MODEL

In this paper we estimate a New-Keynesian dynamic stochastic general equilibrium (NK DSGE) model with heterogeneity in price and wage setting behavior. In a recent study, Coibion and Gorodnichenko develop a DSGE model, in which firms follow four different types of price setting schemes: sticky prices, sticky information, rule-of-thumb, or flexible prices. We enrich Coibion and Gorodnichenko framework by incorporating heterogeneity in nominal wage setting behavior among households. We solve this DSGE model and estimate it using Bayesian techniques for the US economy from 1955 to 2008. The estimation results show the relevance of heterogeneity in wage setting among households. More importantly, we identify qualitative and quantitative business cycle features allowed by the heterogeneity in wage rigidity, such as the persistence in price and wage inflation, which a standard NK model with only Calvo-type wage rigidity fails to achieve. We also show that modeling wage-rigidity heterogeneity—as opposed to standard Calvo wages—amplifies the macroeconomic output fluctuations resulting from a technology shock while it mitigates the output fluctuations following a monetary tightening.

Epidemiology of inflation expectations and internet search: an analysis for India

This paper investigates how inflation expectations of individuals are formed in India. We investigate if the news on inflation plays a role in the formation of inflation expectations following the epidemiology-based work by Carroll (Q J Econ 118(1):269–298, 2003). The standard literature on this topic considers news coverage by the print and audio-visual media as the sources of formation of inflation expectations. Instead, we consider the Internet as a potential common source of information based on which agents form their expectations about future inflation. Based on data extracted from Google Trends, our results indicate that during the period 2006–2018, the Internet has indeed been a common source of information based on which agents have formed their expectations about future inflation, and the Internet search sentiment has had some impact on inflation expectations. Additionally, based on the inflation expectations series derived from the Google Trends data, we find that there is presence of “information stickiness” in the system since only a small fraction of the population update their inflation expectations each period.

Price points and price dynamics

A standard model of price-setting is extended to include an important role for price points as well as sticky information. It makes empirically reasonable predictions about the frequency of price adjustments, the sizes of price increases and decreases, the shape of the hazard function, the fraction of price changes that are price increases, and the relationship between price changes and inflation. When the model of price-setting is integrated into a small-scale DSGE model, it implies plausible aggregate effects of monetary policy in contrast to a model with a prominent role for price points but no information rigidities.

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.

A STICKY–DISPERSED INFORMATION PHILLIPS CURVE: A MODEL WITH PARTIAL AND DELAYED INFORMATION

We study the interaction between dispersed and sticky information by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky information. We compute the unique equilibrium of the game induced by the firms’ pricing decisions and derive the resulting Phillips curve. The main effect of dispersion is to magnify the immediate impact of a given shock when the degree of stickiness is small. Its effect on persistence is minor: even when information is largely dispersed, a substantial amount of informational stickiness is needed to generate persistence in aggregate prices and inflation.

Current account dynamics under information rigidity and imperfect capital mobility

The current account in developed countries is highly persistent and volatile in comparison to their output growth. The standard intertemporal current account model with rational expectations (RE) fails to explain the observed current account and consumption dynamics. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for the consumption dynamics, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility explains both the current account and consumption, provided that sufficiently high degrees of information rigidity and imperfect capital mobility are considered.

Sticky prices versus sticky information: Does it matter for policy paradoxes?

This paper shows that under a strict inflation targeting regime, the government spending multiplier at the zero lower bound (ZLB) is larger under sticky information than under sticky prices. Similarly, well known paradoxes, e.g., the paradox of toil and the paradox of flexibility become more severe under sticky information. For the case of sticky information it is important to assume that the fiscal policy intervention coincides with the duration of zero interest rates, while such a distinction is less important for sticky prices. We unify and clarify results that may appear to contradict each other in the literature.

Is increased price flexibility stabilizing? Redux

What are the implications of increased price flexibility on output volatility? In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. Our results extend to a model with both sticky information and wages. We estimate a quantitative DSGE model using Bayesian methods and using counterfactual experiments show that our results from the simple model continue to apply.

Time-varying information rigidities and fluctuations in professional forecasters' disagreement

Using survey data of US professional forecasters, this paper assesses how forecasters' inattentiveness evolves over time and the implications for fluctuations in dispersion among forecasts. To this end, I employ a time-varying structural VAR model consisting of dispersion among forecasters and the absolute value of their mean forecast revision. The results show that the level of information inattentiveness about inflation increases monotonically from the early 1980s, while a procyclical information stickiness is identified for GDP growth forecasts. I find, however, that countercyclicality in the professional forecasters' forecast revisions, rather than information stickiness, is the main driver of countercyclical fluctuations in disagreement.

Current Account Dynamics Under Information Rigidity and Imperfect Capital Mobility

The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.

Current Account Dynamics Under Information Rigidity and Imperfect Capital Mobility

The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.