IDEAS home Printed from https://ideas.repec.org/a/ibn/ijefaa/v9y2017i11p82-91.html
   My bibliography  Save this article

Price Rigidity and Wage Rigidity: Market Failure or Market Efficiency

Author

Listed:
  • Chao Chiung Ting

Abstract

We observe that money wage and price level are not only rigid but also flexible in different business cycles. For example, there are inflationary recessions (e.g., oil crisis in U.S.) versus deflationary recessions (e.g., Great Depression between 1929 and 1933) as well as price rigidity (e.g., Great Depression between 1934 and 1939). Thus, the general price theory, including wage, should explain both price flexibility and price rigidity. When demand curve shifts during business cycle, the best strategy of the firm is to adjust capital and labor (i.e., size of the firm) so as to shift supply curve toward the same direction as demand curve shifts. If both supply curve and demand curve shift toward the same direction proportionally, there is perfect price rigidity. When product price is rigid, the firm is willing to pay previous wage. Thus, price rigidity and wage rigidity are effect (i.e., not only ex-post phenomenon that we observe but also endogenous market efficiency that arises from to the coordination of supply and demand), not exogenous market failure to disturb economy.

Suggested Citation

  • Chao Chiung Ting, 2017. "Price Rigidity and Wage Rigidity: Market Failure or Market Efficiency," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 82-91, November.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:11:p:82-91
    as

    Download full text from publisher

    File URL: http://ccsenet.org/journal/index.php/ijef/article/view/70392/38765
    Download Restriction: no
    File URL: http://ccsenet.org/journal/index.php/ijef/article/view/70392
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(Supplemen), pages 823-838.
    2. Michael D. Bordo & John Landon Lane & Angela Redish, 2004. "Good versus Bad Deflation: Lessons from the Gold Standard Era," NBER Working Papers 10329, National Bureau of Economic Research, Inc.
    3. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    4. Lucas, Robert E, Jr & Rapping, Leonard A, 1972. "Unemployment in the Great Depression: Is There a Full Explanation?," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 186-191, Jan.-Feb..
    5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    6. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    7. Etienne Gagnon, 2009. "Price Setting during Low and High Inflation: Evidence from Mexico," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 1221-1263.
    8. Claudio Borio & Magdalena Erdem & Andrew Filardo & Boris Hofmann, 2015. "The costs of deflations: a historical perspective," BIS Quarterly Review, Bank for International Settlements, March.
    9. Christopher J. Neely, 2010. "U.S. historical experience with deflation," Economic Synopses, Federal Reserve Bank of St. Louis.
    10. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-754, Sept./Oct.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chao Chiung Ting, 2022. "Pollution, Production Efficiency and Economic Growth: A Synthesis," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(9), pages 1-1, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George A. Akerlof, 2003. "Behavioral Macroeconomics and Macroeconomic Behavior," The American Economist, Sage Publications, vol. 47(1), pages 25-47, March.
    2. Rongrong Sun, 2014. "Nominal rigidity and some new evidence on the New Keynesian theory of the output-inflation tradeoff," International Economics and Economic Policy, Springer, vol. 11(4), pages 575-597, December.
    3. Chao Chiung Ting, 2018. "Phillips Curve Is a Particular Case that Economists Misinterpret the Correlation between Two Dependent Variables for Causal Relation," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(11), pages 1-70, November.
    4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    5. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    6. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
    7. Greg Tkacz, 2000. "Fractional Cointegration and the Demand for M1," Staff Working Papers 00-12, Bank of Canada.
    8. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    9. Marco Bonomo & Carlos Carvalho, 2010. "Imperfectly Credible Disinflation under Endogenous Time‐Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 799-831, August.
    10. Ieva Rubene & Paolo Guarda, 2004. "The new Keynesian Phillips curve: empirical results for Luxembourg," BCL working papers 11, Central Bank of Luxembourg.
    11. Slanicay Martin, 2014. "Some Notes on Historical, Theoretical, and Empirical Background of DSGE Models," Review of Economic Perspectives, Sciendo, vol. 14(2), pages 145-164, June.
    12. Costain, James & Nakov, Anton, 2015. "Precautionary price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 218-234.
    13. James Costain & Anton Nakov, 2019. "Logit Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 43-78, February.
    14. Gaspar, Vitor & Levin, Andrew & Smets, Frank & Martins, Fernando Manuel, 2007. "Evidence from Surveys of Price-Setting Managers: Policy Lessons and Directions for Ongoing Research," CEPR Discussion Papers 6227, C.E.P.R. Discussion Papers.
    15. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.
    16. Bhattarai, Keshab, 2016. "Unemployment–inflation trade-offs in OECD countries," Economic Modelling, Elsevier, vol. 58(C), pages 93-103.
    17. Costain, James & Nakov, Anton, 2011. "Distributional dynamics under smoothly state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 646-665.
    18. Azad, Rohit, 2016. "Plurality in Teaching Macroeconomics," MPRA Paper 76340, University Library of Munich, Germany.
    19. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
    20. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.

    More about this item

    Keywords

    price rigidity; wage rigidity; menu cost; price setting; business cycle; monetary policy; market failure; market efficiency;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ijefaa:v:9:y:2017:i:11:p:82-91. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.