Empirical Evidence

Abstract

Abstract Are prices sticky or do they adjust to changes in market conditions? Casual empiricism suggests a positive answer to both questions. Prices are often observed to adjust infrequently, and supply does not always equal demand; but, on the other hand, price changes are also often experienced. Prices do change, but do they change instantaneously to changes in market conditions, and if not, what drives the adjustment process? The issue that interests us at this stage is whether prices adjust instantaneously or sluggishly to changes in market conditions. If evidence points towards the latter, there is a need to consider reasons why price-setters react ‘slowly ‘ to changes in market conditions. The focus here is not on product-specific prices but more on general or aggregate phenomena relating to the adjustment of prices. We shall start by presenting some stylized facts on the behaviour of prices over the business cycle. The empirical evidence presented here imposes as little theory as possible, aiming at presenting some facts motivating the theoretical interest in price adjustment. More rigorous testing of particular price models will not be covered here but will be taken up in relation to the presentation of the theories.