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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Endogenous Price Stickiness and Business Cycle Persistence
Michael T. Kiley

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

Full paper (122 KB PDF) | Full paper (435 KB Postscript)

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Last update: July 16, 1997