Aggregate and Individual Price Adjustment
66 Pages Posted: 21 Dec 2000
Date Written: December 1988
Central to the Keynesian interpretation of economic fluctuations is the notion that prices and wages are rigid or "sticky," so that movements in aggregate demand, rather than being quickly reflected in price level movements, have instead long-lasting effects on output and economic activity. The word "rigidity" covers, in fact, two quite different notions. The first, which I shall refer to as real rigidity, is that real wages and markups of prices over wages respond little to shifts in demand. The second, which I shall refer to as nominal rigidity, is that nominal wages and prices respond slowly to changes in their determinants and in particular respond slowly to each other. Both real and nominal rigidities combine to lead to lasting effects of changes in aggregate demand on output.
JEL Classification: 02, 13
Suggested Citation: Suggested Citation