Sticky Prices Versus Sticky Information: Does it Matter for Policy Paradoxes?

Gauti B. Eggertsson, Vaishali Garga

NBER Working Paper No. 23961
Issued in October 2017
NBER Program(s):Monetary Economics

This paper shows that government spending multiplier at the zero lower bound (ZLB) is larger under sticky information than under sticky prices. Similarly, well known paradoxes, e.g., the paradox of toil and the paradox of flexibility become more severe under sticky information. For the case of sticky information it is important to assume that the fiscal policy intervention coincides with the duration of zero interest rates, while such distinction is less important in some special cases for sticky prices. This allows us to unify and clarify results that may appear to contradict each other in the literature.

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Document Object Identifier (DOI): 10.3386/w23961

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