Sticky-information vs. Backward-looking indexation: Inflation inertia in the U.S

This paper confronts two views of explaining the empirical macroeconomic sluggishness of output, inflation and wage inflation for the latest U.S. experience. A baseline model of sticky-prices is added with two variants of producing inertia: a) sticky-information applied to firms, workers and households; and b) a backward-looking inflation indexation along with habit formation. These variants yield two rival dynamic, stochastic general equilibrium models which have different interpretations about the nature of price and wage rigidities. The rival models are then confronted with U.S. data in order to determine its plausibility. It is then shown that the sticky-information model yields slightly better predictions to account for inflation and wage inflation. Both models, however, deliver poor predictions for the effects of output after a monetary policy shock.