Sticky Information and Economic Dynamics

Abstract

In this dissertation, I investigate economic dynamics under the sticky information model as- sumption. First, I propose a novel method for evaluating the likelihood of a nonlinear model with time-varying parameters and endogenous variables. Using this method, I estimate model param- eters and unobserved time-varying parameters of the sticky information Phillips curve. Finally, I adapt a bounded rationality assumption to an endogenous sticky information model, further enriching our understanding of economic behavior under these conditions.In Chapter 1, I propose a method to evaluate the likelihood of a nonlinear model with time- varying parameters and endogenous variables. Existing techniques to estimate time-varying param- eter models with endogenous variables are restricted to conditionally linear models. The proposed approach modifies a Sequential Monte Carlo filter to evaluate the likelihood of a nonlinear process with an endogenous variable. The modified filter augments the typical measurement and state equations with an equation incorporating instrumental variables. I evaluate the performance of a Bayesian estimator based on the likelihood calculation using simulations and find that the approach generates accurate estimates of both parameters and the unobserved time-varying parameter. In Chapter 2, I analyze the empirical evidence of variation in a structural parameter of the sticky information Phillips curve. This involves scrutinizing both the statistical significance of the variation and its economic implications. Upon examination, I discover a systematic trend in firms’ attention to relevant macroeconomic conditions, indicating a decline in attention over time. In Chapter 3, I study the stability of equilibrium in a general equilibrium model with information frictions. The equilibrium attentiveness rate is stable under a decreasing gain adaptive learning scheme. This stability motivates a review of the transition between equilibrium rates; a drop in the cost of gathering and processing information is used to shift the equilibrium. The attentiveness rate immediately jumps and increases asymptotically, approaching the new equilibrium.