In 1994, Greg Mankiw and Lawrence Ball wrote the essay titled "A Sticky Price Manifesto" discussing the prices of certain items being resistant to change.
On the Bloomberg Review, Noah Smith revisits this theory and discusses how price stickiness can contribute to the recession. As bursts of technological advancement happen, price stickiness causes a burst of inflation before economic growth occurs.
David Song discusses in another article that price stickiness causes Australians to scale down consumption.
I find this theory strangely related to what we are discussing in class about Piketty. Technological advancement is closely related to prices of capital and capitalist economy in general. While this theory has been around for about 20 years (and also the work of major contemporary economists), I have never heard this theory being brought up in class before.
What are your thoughts?
Consequences of price stickiness are many and important. I agree with Mr. Smith that sticky prices can cause recession. The flexibility of wages in recession is dangerous since sticky prices have a significant and adverse effect on real wages and profits;it does not improve price competitiveness .
ReplyDeleteI agree with Fatima in that sticky prices can have many consequences. Also, when a technological boom occurs, sticky nominal wages for workers are cut since they display downward rigidity according to Keynesian economics. As a result, unintentional unemployment occurs which leads to a decrease in aggregate supply, which causes the economy to take a longer time to reach equilibrium in an indefinite short-run. Overall, sticky prices (and wages) are problematic in Keynesian economics.
ReplyDeleteI understand the premise of sticky prices and that they naturally change sluggishly as the market changes, but I don't understand how that would be solved necessarily. My only thought is that prices could update at real time like stocks at a stock exchange, but that could complicate things way more than necessary.
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