Sticky Prices in the United States

TLDR

Prices are often argued to be sticky in the U.S., but empirical support lacks formal behavioral theory. The study proposes a theory that explains price stickiness by attributing costs to price changes to avoid upsetting customers. The authors develop a rational‑expectations equilibrium model of many firms, estimate it with postwar U.S. data, and test it against alternative hypotheses.

Abstract

It has often been argued that prices are sticky in the United States. However, the empirical papers that have claimed to support this view have not reflected any formal behavioral theory. This paper presents a theory that justifies price stickiness, namely, that firms, fearing to upset their customers, attribute a cost to price changes. The rational expectations equilibrium of an economy with many such firms is presented, estimated with postwar U.S. data, and tested against alternative hypotheses. The results largely support the model. Furthermore, the hypothesis that prices are not sticky is rejected by U.S. data.