Velocity Wanted: Sticky Prices yet Flexible Price Level
Some macroeconomists differentiate themselves with the name “ new Keynesian ” from other macroeconomists. Most typically they imagine the so-called “sticky price model of AS-AD” for the medium run, which must fall between the short and long runs. Their Sophistic Way. The model is often described with the following equation: P= s∙ EP + (1– s)∙[P+ a ∙ (Y– Y*)] , where EP is the expected price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” a positive coefficient. Procrustean Bed . See We Told You So: P= [a ∙ (1– s)/ s]Y + [EP– a ∙ (1– s) ∙ Y*/s] . The AS curve is upward sloping! Wonderful, but for reminding us of the super “classical” Greek mythology: Tailor, and that Swift, the customer’s feet to the bed! A Greek Equation . To emulate Eugene Fama , a Chicago boy, “No similarity is completely similar.” The SPM (for sticky price model) and the PB...