Procrustean Art of Backtracking: “AS Curve: the Sticky-Price Model”

 

The following is copied from somewhere else and then slightly modified.

             Under the assumption that some firms hold their prices sticky, certain macroeconomists including the influential Harvard economist Gregory Mankiw (Macroeconomics, 8^th ed. §14-1) illustrate the AS curve to be P= s∙EP+ (1– s)∙[P+ a∙(Y– Y*)], where EP is the planned price level (“sticky prices”), “s” the fraction of firms stuck to EP, Y* the natural level of output, and “a” is a coefficient. Incidentally, the coefficient has a very complicated metric but nevertheless has little meaning as a link between indexes.

             The equation has many flaws in addition to dimension aberration and being a relationship of indexes of little meaning on their own. First among other additional defects, firms cannot “set” their prices without affecting their outputs. In the given scenario, both prices and quantities of individual firms cannot be definitive beforehand; or if we set a price we cannot control the quantity any more.

             Second, the supply curve should be defined by the cost condition before helping the price level determined, never the other way around. More generally, causality is not clearly addressed in the somewhat lengthy process of “algebraic rearrangement” (G. Mankiw, ibid) of equations.

             Third, the total number of firms may not be fixed because some firms are dead over the fiscal year, half the standard length of the short run. If so, EP cannot be defined because it must be consequential as an average from, for instance, a yet-to-be-fixed number of firms. Only because some firms go extinct along the way, the number of firms is unknowable ex ante.

             Fourth, the fraction of “s” is much easier said than meant with. In the first place, we have yet to hear any macroeconomist say how to fracture; nominal in value (P included) vs. real in quantity (Y included), simple to weighted to sophisticated, and the like.

             Fifth, the natural level (Y*) is as inscrutable as the fraction (s). A central banker in the world as GDP accountant has yet to come up with an estimate for it.

 

Where is the AS curve? Everywhere except for in the AS-AD model.

 

Additional Notes:

1)     The unit of account for the price level (P) must be the US dollar if in Cambridge, Mass. The “fraction s” must be calculated with revenues in the dollar as the weight. Thou shalt not take numeric or quantity as weight in its stead.

2)     The “coefficient a” shall be counted in “dollar-years” and consequently disqualified as exponent, which never in macroeconomics seems to be taken care of.

3)     The hypothesis, true or false, might not be worth our while. In the first place, there is no way whatsoever to find “s” or “a” and that “empirically.”