New study reveals surprising impacts of sticky prices on economic policy
The common New-Keynesian model with sticky prices can have strange effects in certain situations. Fiscal and forward guidance multipliers can be surprisingly large, and positive supply shocks might actually lower production. However, if we consider sticky information instead of prices, the results change. Fiscal and monetary multipliers become smaller, positive supply shocks increase output, and more flexible prices can improve the economy's response. This suggests that policymakers should be careful when using a single, sticky-price framework to make decisions. Strategies like nominal-income targeting could help policymakers influence demand in both sticky-price and sticky-information models.