Are Prices Sticky and Does It Matter?

Randall Wright, Consultant

January 2016 | Federal Reserve Bank of Minneapolis Economic Policy Paper 16-2 | With Liang Wang

Many economists believe that prices are “sticky”—they adjust slowly. This stickiness, they suggest, means that changes in the money supply have an impact on the real economy, inducing changes in investment, employment, output and consumption, an effect that can be exploited by policymakers.

In this essay, we argue that price stickiness doesn’t necessarily generate an exploitable policy option. We describe a model in which money is neutral (that is, growth or reduction in money supply doesn’t impact real economic activity) even in a context of sluggish price adjustment.