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

This paper compares two approaches towards the empirical inertia of inflation and output. Two variants that produce persistence are added to a baseline DSGE model of sticky prices: 1) sticky information applied to firms, workers, and households; and 2) a backward-looking inflation indexation along with habit formation. The rival models are then estimated using U.S. data in order to determine their plausibility. It is shown that the sticky information model is better at predicting inflation, wage inflation, and the degree of price stickiness. Output dynamics, however, are better explained by habit persistence.