Abstract: Both imperfect information and sticky prices allow
nominal shocks to act as business cycle impulses, but
only sticky prices propagate the real effects of
nominal shocks. A simple model of imperfect information
and sticky prices developed herein indicates that high
rates of inflation lead to less price stickiness, and
hence less persistent output fluctuations. Estimation
of the model, as well as simple autocorrelations of
real output, indicate that indeed output fluctuations
are less persistent in high inflation economies. These
results lend little support to models in which output
persistence is explained through persistent real
shocks, capital accumulation, or adjustment costs.
Keywords: Output persistence, sticky prices, menu costs
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