Transitional dynamics in sticky-information general equilibrium models

Abstract

We address the stability properties of a benchmark general equilibrium model involving pervasive stickiness on information updating. Dynamic behavior is determined essentially by two types of entities: on one hand, the degree of information stickiness that characterizes the price-setting decisions of firms and the consumption and labor supply decisions of households and, on the other hand, a policy parameter that indicates how the central bank acts in order to stabilize prices. Under perfect foresight, stability will hold and the degree of information stickiness simply indicates the velocity of convergence towards the steady-state. If the ability to forecast future events is less than perfect, stability will then depend on monetary policy-the main result is that the stickier the diffusion of information is, the more aggressive monetary policy must be in order to guarantee convergence towards the long-term steady-state.