Sticky prices: what is the evidence?

This article reviews the idea that sticky prices are important for understanding business cycles. Mark Wynne begins with a critical survey of the literature documenting the stylized facts about prices in individual markets. His first point is that there is remarkably little evidence that the actual transactions prices of most products are, in fact, sticky. Such evidence as there is to support the notion of widespread price stickiness is heavily biased toward low-tech products that account for a very small fraction of total output and is a thin reed on which to base a theory of business fluctuations. Furthermore, the observation that posted prices do not change very frequently cannot always be interpreted as evidence that markets are not clearing. There is some evidence to suggest that frequently firms alter product characteristics other than price to allocate goods and services, and that these changes in product characteristics are unobserved. ; In view of the difficulty in interpreting whether prices are at other than market-clearing values, Wynne argues that the only true test of a model in which price stickiness plays a major role in explaining business cycles is to look at how well it explains the cyclical phenomena it is supposed to explain. One simple test of a model along these lines consists of looking at the various correlations generated by the model and comparing them with the data. Wynne reviews some recent attempts along these lines and concludes that, while there may be some role for price stickiness in explaining business cycles in the U.S. economy, the case remains unproven.