Guest Editors' Preface to the Special Issue on Price and Wage Dynamics (original) (raw)
2010, Scandinavian Journal of Economics
The study of business cycles is divided between Keynesian (or New Keynesian) and market-clearing approaches. Yet both approaches exhibit key empirical failings. Market-clearing models require highly procyclical productivity and real wages to explain the cyclicality of consumption and hours, but these are not apparent in the data. The Keynesian models incorporate nominal and real rigidities to motivate an important impact of monetary policy shocks. At the micro level, however, wage and price changes appear too frequent and too substantial to support the nominal inertia underlying this framework. There is a glaring need for work that either alters this perceived empirical picture or alters our models to fit better with evidence. This special issue of The Scandinavian Journal of Economics is devoted to price and wage dynamics. The contributions have been chosen from a large number of submissions that have all undergone standard peer review. Four papers are concerned with price rigidity and the real effects of monetary policy. Rotemberg considers the effect on price rigidity if consumers experience regret costs when they see an unexpected price change. If firms internalize these costs, the size of price increases will be less sensitive to inflation than in models with fixed costs of changing prices, and they will be more in line with evidence on firms' price-setting. Alvarez and Burriel consider a model in which sellers face a constant probability of nominal price changes, but this probability is fully heterogeneous both across and within sectors. This heterogeneity is matched to panel data on price changes separately for the US and Europe. The authors find that models without heterogeneity in price stickiness within sectors substantially overstate the real impact of monetary shocks because a sectoral sticky-price model does not recognize the importance of substitution across the sticky and flexible price-setters in response to a shock. Mizuno, Nirei, and Watanabe investigate pricing behavior in an online marketplace where prices are observed by the second. When prices fall rapidly, there is an increase in both the frequency and the size of price changes. There is positive autocorrelation in the frequency but not in the size of price adjustment. Pricing behavior seems to be state-dependent rather than time-dependent.
Sign up for access to the world's latest research.
checkGet notified about relevant papers
checkSave papers to use in your research
checkJoin the discussion with peers
checkTrack your impact
Loading Preview
Sorry, preview is currently unavailable. You can download the paper by clicking the button above.