ASYMMETRIC PRICE RIGIDITY AND INFLATIONARY BIAS

Abstract

When prices adjust in response to market disturbances, they usually do so in discrete jumps.Even when market conditions are changing continuously, prices tend to remain fixed for substantial lengths of time.The commodities fitting this general pattern include most retail goods, services, and intermediate materials.'While it is widely recognized that this pricing pattern holds for both upward and downward adjustments, there is no consensus as to whether these are mirror images for given individual firms.Some scholars believe that upward adjustments are generally more pronounced in magnitude or frequency than downward adjustments.Robert Solow (1980), for instance, believes on the basis of casual observations of some macroeconomic evidence, that commodity prices are sticky downward.Many others, however, view the issue as a completely open question.Phillip Cagan (1979) has documented that prices in the United States tend to rise more in response to increases in demand than they fall in response to corresponding decreases in demand; but he is careful to point out that our present knowledge does not permit us to attribute his evidence to biases in the adjustment behavior of individual firms.Arthur Okun's (1981) research, in contrast, does not point toward an upward bias in prices, yet he, too, agrees that the issue is far from closed.2

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