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Sticky prices: what is the evidence?

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  • Mark A. Wynne

Abstract

This article reviews the idea that sticky prices are important for understanding business cycles. Mark Wynne begins with a critical survey of the literature documenting the stylized facts about prices in individual markets. His first point is that there is remarkably little evidence that the actual transactions prices of most products are, in fact, sticky. Such evidence as there is to support the notion of widespread price stickiness is heavily biased toward low-tech products that account for a very small fraction of total output and is a thin reed on which to base a theory of business fluctuations. Furthermore, the observation that posted prices do not change very frequently cannot always be interpreted as evidence that markets are not clearing. There is some evidence to suggest that frequently firms alter product characteristics other than price to allocate goods and services, and that these changes in product characteristics are unobserved. ; In view of the difficulty in interpreting whether prices are at other than market-clearing values, Wynne argues that the only true test of a model in which price stickiness plays a major role in explaining business cycles is to look at how well it explains the cyclical phenomena it is supposed to explain. One simple test of a model along these lines consists of looking at the various correlations generated by the model and comparing them with the data. Wynne reviews some recent attempts along these lines and concludes that, while there may be some role for price stickiness in explaining business cycles in the U.S. economy, the case remains unproven.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1995)
Issue (Month): Q I ()
Pages: 1-12

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Handle: RePEc:fip:fedder:y:1995:i:qi:p:1-12

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Keywords: Business cycles ; Prices;

References

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  1. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  2. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  3. Rockoff,Hugh, 1984. "Drastic Measures," Cambridge Books, Cambridge University Press, number 9780521244961, April.
  4. Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
  5. Benjamin Eden, 2001. "Inflation and Price Adjustment: An Analysis of Microdata," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 607-636, July.
  6. Laurence Ball & N. Gregory Mankiw, 1994. "A Sticky-Price Manifesto," NBER Working Papers 4677, National Bureau of Economic Research, Inc.
  7. Cho, J.O. & Cooley, T.F., 1991. "The Business Cycle with Nominal Contracts," RCER Working Papers 260, University of Rochester - Center for Economic Research (RCER).
  8. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industiral Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1.
  9. Koelln, K. & Rush, M., 1990. "Rigid Prices And Flexible Products," Papers 90-1, Florida - College of Business Administration.
  10. Mark A. Wynne & Fiona Sigalla, 1993. "A survey of measurement biases in price indexes," Research Paper 9340, Federal Reserve Bank of Dallas.
  11. Lee E. Ohanian & Alan C. Stockman, 1994. "Short-run effects on money when some prices are sticky," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-24.
  12. Dennis W. Carlton, 1987. "The Theory and the Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?," NBER Working Papers 2178, National Bureau of Economic Research, Inc.
  13. Murray Foss, 1993. "Does Government Regulation Inhibit the Reporting of Transactions Prices by Business?," NBER Chapters, in: Price Measurements and Their Uses, pages 275-304 National Bureau of Economic Research, Inc.
  14. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  15. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  16. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  17. Finn E. Kydland, 1989. "The role of money in a business cycle model," Discussion Paper / Institute for Empirical Macroeconomics 23, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Renner, Elke & Tyran, Jean-Robert, 2004. "Price rigidity in customer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 575-593, December.
  2. Sylvain Leduc, 2000. "Why Is the Business Cycle Behavior of Fundamentals Alike Across Exchange Rate Regimes?," Econometric Society World Congress 2000 Contributed Papers 1843, Econometric Society.
  3. Dutta, Shantanu & Bergen, Mark & Levy, Daniel, 2002. "Price flexibility in channels of distribution: Evidence from scanner data," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1845-1900, September.
  4. Alexander L. Wolman, 2000. "The frequency and costs of individual price adjustments," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-22.
  5. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
  6. Luca Dedola & Sylvain Leduc, 2002. "Why are business cycles alike across exchange-rate regimes?," Working Papers 02-11, Federal Reserve Bank of Philadelphia.
  7. Ana-Maria Fuertes & Shelagh A. Heffernan, 2009. "Interest rate transmission in the UK: a comparative analysis across financial firms and products," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 45-63.

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