Sticky information and sticky prices

In the U.S. and Europe, prices change at least once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Mankiw and Reis [2002. Sticky information versus sticky prices: a proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295-1328], Sims [2003. Implications of rational inattention. Journal of Monetary Economics 50(3), 665-690], and Woodford [2003. Princeton University Press: Princeton, NJ], can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters update information on macro shocks less frequently than information on micro shocks. We then examine price changes in the micro data underlying the U.S. CPI. Empirical price changes react to old information, just as sticky information models predict. (C) 2007 Elsevier B.V. All rights reserved.