Nominal rigidity

Heterodox

Nominal rigidity, also invited as price-stickiness or wage-stickiness, is the situation in which a nominal price is resistant to change. ready nominal rigidity occurs when a price is constant in nominal terms for a relevant period of time. For example, the price of a particular usefulness might be constant at $10 per item for a year. Partial nominal rigidity occurs when a price may reshape in nominal terms, but not as much as it would whether perfectly flexible. For example, in a regulated market there might be limits to how much a price can conform in a condition year.

If one looks at the whole economy, some prices might be very flexible and others rigid. This will lead to the aggregate price level which we can think of as an average of the individual prices becoming "sluggish" or "sticky" in the sense that it does not respond to macroeconomic shocks as much as it would if any prices were flexible. The same impression can apply to nominal wages. The presence of nominal rigidity is an important factor of macroeconomic concepts since it can explain why markets might notequilibrium in the short run or even possibly the long run. In his The General Theory of Employment, Interest and Money, John Maynard Keynes argued that nominal wages display downward rigidity, in the sense that workers are reluctant to accept cuts in nominal wages. This can lead to involuntary unemployment as it takes time for wages to reform to equilibrium, a situation he thought applied to the Great Depression.

Evidence

There is now a considerable amount of evidence about how long price-spells last, and it suggests that there is a considerable measure of nominal price rigidity in the "complete sense" of prices remaining unchanged. A price-spell is a duration during which the nominal price of a specific item supports unchanged. For some items, such(a) as gasoline or tomatoes, prices are observed to vary frequently resulting in many short price spells. For other items, such(a) as the represent of a bottle of champagne or the exist of a meal in a restaurant, the price might cover fixed for an extended period of time numerous months or even years. One of the richest domination of information about it is for price-quote data used to gain the Consumer Price Index CPI. The statistical agencies in many countriestens of thousands of price-quotes for specific items regarded and identified separately. month in an arrangement of parts or elements in a particular form figure or combination. to realize the CPI. In the early years of the 21st century, there were several major studies of nominal price rigidity in the US and Europe using the CPI price quote microdata. The coming after or as a or done as a reaction to a question of. table helps nominal rigidity as reflected in the frequency of prices changing on average per month in several countries. For example, in France and the UK, regarded and planned separately. month on average, 19% of prices change 81% are unchanged, which implies that an average price spell lasts approximately 5.3 months the expected duration of a price spell is equal to the reciprocal of the frequency of price modify if we interpret the empirical frequency as representing the Bernoulli probability of price change generating a negative binomial distribution of durations of price-spells.

The fact that price spells last on average for 3.7 months does not mean that prices are not sticky. That is because many price changes are temporary for example sales and prices revert to their usual or "reference price". Removing sales and temporary price cuts raises the average length of price-spells considerably: in the US it more than doubled the mean spell duration to 11 months. The quotation price can progress unchanged for an average of 14.5 months in the US data. Also, it is prices that we are interested in. if the price of tomatoes changes every month, the tomatoes price will generate 12 price spells in a year. Another price that is just as important for example, canned tomatoes might only change one time per year one price spell of 12 months. Looking at these two goods prices alone, we observe that there are 13 price spells with an average duration of 12+13/13 equals about 2 months. However, if we average across the two items tomatoes and canned tomatoes, we see that the average spell is 6.5 months 12+1/2. The distribution of price spell durations and its mean are heavily influenced by prices generating short price spells. If we are looking at nominal rigidity in an economy, we are more interested in the distribution of durations across prices rather than the distribution of price spell durations in itself. There is thus considerable evidence that prices are sticky in the "complete" sense, that the prices remain on average unchanged for a prolonged period of time around 12 months. Partial nominal rigidity is less easy to measure, since it is difficult to distinguish whether a price that changes is changing less than it would if it were perfectly flexible.

Linking micro data of prices and cost, Carlsson and Nordström Skans 2012, showed that firms consider both current and future expected cost when determine prices. The finding that the expectation of future conditions matter for the price generation today allowed strong evidence in favor of nominal rigidity and the forward looking behavior of the price setters implied by the models of sticky prices outlined below.