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It seems that I am on a vendetta against the myth of rigid prices, but I find it frustrating that macroeconomics keeps insisting on models where price rigidity is crucial despite the evidence that prices are not rigid. I have given plenty of evidence on this blog that retail prices are indeed flexible, in the United States and elsewhere, and even evidence that wages are more flexible than assumed. Too many links to list them here.
But there is also an argument out there that retail prices are only part of the question, producer prices are where the real action is, and those are definitely rigid. If you are such a firm believer is price rigidity, you are in for a big surprise that should make you lose your faith. Pinelopi Koujianou Goldberg and Rebecca Hellerstein show that producer prices are about as flexible as consumer prices that include temporary sales, and more flexible than consumer prices excluding sales periods. So, what is going to be the next line of defense of the religion of price rigidity?
Monday, February 1, 2010
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4 comments:
Huh? So, if in the US prices are not rigid then prices are not rigid anywhere else in the world? The study of US economics is not the same as the study of economics.
The next line of defense? The level of market competition!
That's not the issue, is it? People "need" rigidity to break neutrality. They think monetary policy is very important for short-run outcomes. -- So what should we make of that?
We do not even know whether monetary policy has a real impact. Models only tell us it has when prices are rigid, and that is the justification of those who "believe" in monetary policy. At this point, it really looks like you need to have "faith" to support active monetary policy
Why all this discussion. I learned as a student forty years ago that prices for raw materials are more flexible than the prices of end products and price flexibility diminished as you get closer to the end of the production chain. Further, money wages are significantly more flexible than the price level is. (You get increasing real wages in the boom.) All this is a set of well-known stylized facts.
Yet all this does not imply that markets are allways cleared! This seems patently not to be the case, unless you define market clearing in a tautological way. Some people who argue for price flexibility seem to draw this premature conclusion.
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