Working Paper: CEPR ID: DP5521
Authors: N. Gregory Mankiw; Ricardo Reis
Abstract: 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.
Keywords: business cycles; sticky information
JEL Codes: E10; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pervasive stickiness of information (D83) | acceleration phenomenon (C22) |
| pervasive stickiness of information (D83) | smoothness of real wages (J31) |
| pervasive stickiness of information (D83) | gradual response of real variables to shocks (C22) |
| pervasive stickiness of information (D83) | explanation of business cycles (E32) |