A Hybrid Sticky-Price and Sticky-Information Model

This paper shows that a hybrid of the sticky-price and sticky-information models of price adjustment is able to deliver a hump-shaped inflation response to monetary shocks without counterfactually implying, as in Mankiw and Reis (2002) or Altig et al. (2005), that individual firms' prices change each quarter (whether they respond or not to the shock). Under the assumption that firms' price-setting decisions are strategically neutral, the inflation response to a transitory shock to the money-supply growth rate is hump-shaped for the hybrid model, whereas it is monotonic for both the sticky-price and sticky information models. If the shock is permanent, then this response is hump-shaped for the sticky-information and the hybrid models, whereas it is flat for the sticky-price model