Essays on inflation dynamics

A key stylized fact in monetary economics is that unexpected changes in monetary policy affect inflation only after a long delay. The inability of the standard monetary model, based on the idea that firms face costs to changing prices, to replicate this feature of the data has led researchers to consider alternative pricing mechanisms. A prominent case is the sticky information approach, which emphasizes costs to acquiring information. The papers of this dissertation consider the theoretical and empirical support for the sticky information model.;The first paper demonstrates that the sticky information model is only capable of reproducing the observed delayed response of inflation to monetary policy shocks for certain combinations of parameter values. Particularly important is the degree of strategic complementarity in price setting, which ensures that those firms who are aware of a monetary shock find it optimal to keep their prices largely unchanged. The second paper finds that the sticky information model is strongly rejected empirically against the baseline sticky price model. The primary reason is that predicted inflation in the sticky information model places substantial weight on past forecasts of current inflation. Because historical inflation forecasts consistently underestimate inflation in the 1970s and overestimate inflation since the 1980s predicted inflation from the sticky information model inherits these patterns.;The third paper proposes a hybrid model in which firms may follow different price-setting mechanisms. These firms coexist and interact via their respective pricesetting decisions. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. The baseline results imply that heterogeneity in price setting behavior cannot be rejected in the sense that no single price setting assumption is sufficient to match the moments of the data. Sticky-price firms account for a little over 50% of firms, with the remaining balance split almost evenly across flexible, rule-of-thumb, and sticky information firms.