Thursday, January 7, 2010

Prices are not rigid in the UK, too

In macroeconomics, there is a continuing debate on the rigidity of prices. If they are rigid, monetary policy matters, if not one of the key assumptions of a real business cycle model is met. It is obvious that there is some rigidity, but the qeustion is whether it matters at the macroeconomic level. I have reported previously on mounting evidence that prices are much more flexible than previously thought (1, 2, 3, 4)

Colin Ellis adds to this literature with a study of supermarket prices in the United Kingdom. And, surprise, they are just as flexible as recent studies have shown for the United States. It is time for everyone to realize that menu costs are a thing of the past. With current information technology, pricing is much more flexible than the production schedule (which gained tremendously in flexibility as well), and those New Keynesian models can safely be shelved now. They may be useful for historical studies, but I am not even sure of that.

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