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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.

Suggested Citation

  • Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
  • Handle: RePEc:fip:fedder:y:1995:i:qi:p:1-12
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    File URL: http://www.dallasfed.org/assets/documents/research/er/1995/er9501a.pdf
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    References listed on IDEAS

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    1. Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 13-33.
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    3. 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.
    4. Wynne, Mark A & Sigalla, Fiona D, 1996. " A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 55-89, March.
    5. Blinder, Alan S, 1991. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, American Economic Association, vol. 81(2), pages 89-96, May.
    6. 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 349-389, April.
    7. Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 127-151.
    8. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
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    10. 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.
    11. Carlton, Dennis W., 1989. "The theory and the facts of how markets clear: Is industrial organization valuable for understanding macroeconomics?," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 15, pages 909-946 Elsevier.
    12. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 245-274.
    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.
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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. 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.
    3. Luca Dedola & Sylvain Leduc, 1999. "On exchange rate regimes, exchange rate fluctuations, and fundamentals," Working Papers 99-16, Federal Reserve Bank of Philadelphia.
    4. 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.
    5. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    6. Dedola, Luca & Leduc, Sylvain, 2001. "Why Is the Business-Cycle Behaviour of Fundamentals Alike across Exchange-Rate Regimes?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 401-419, October.
    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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    Keywords

    Business cycles ; Prices;

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