Asymmetric Price Adjustment and Economic Fluctuations


Mankiw NG, Ball L. Asymmetric Price Adjustment and Economic Fluctuations. Economic Journal. 1994;104 (Mar) :247-261.


This paper considers a possible explanation for asymmetric adjustment of nominal prices. We present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. We use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation.

Last updated on 07/16/2012