Sticky Prices Versus Sticky Information: Does it Matter for Policy Paradoxes?
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.
We thank seminar participants at Brown University and the Federal Reserve Bank of Boston for helpful comments and suggestions. All errors are our own.The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.