DP5521 Pervasive Stickiness (Expanded Version)

Author(s): N Gregory Mankiw , Ricardo Reis

Publication Date: March 2006

Keyword(s): business cycles , sticky information

JEL(s): E10 , E30

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5521.asp

This paper explores a macroeconomic model of the business cycle in which stickiness of information is pervasive. We start from a familiar benchmark classical model and add to it the assumption that there is sticky information on the part of consumers, workers, and firms. We evaluate the model against three key facts that describe short-run fluctuations: the acceleration phenomenon, the smoothness of real wages, and the gradual response of real variables to shocks. We find that pervasive stickiness is required to fit the facts. We conclude that models based on stickiness of information offer the promise of fitting the facts on business cycles while adding only one new plausible ingredient to the classical benchmark.