Wage and Price Stickiness in Macroeconomics: Historical Perspective

Abstract

There is more to the history of macroeconomics than a series of bilateral conflicts between competing schools of thought, but such debates have been a significant part of the story. Most recently the competing schools have worn the labels `New-classical' and `New-Keynesian', and the major issue between them has been the role of money wage- and price-stickiness in generating those more or less regular fluctuations in economic activity which we refer to as `the business cycle'. For New-classicals, output and employment fluctuations are either responses to shocks to tastes and technology, or to unanticipated shifts in aggregate demand, typically stemming from money supply changes. In either cases though, prices give signals to which quantities respond, and variations in real magnitudes take place precisely because prices change. New-Keynesians emphasise demand-side shocks but, in their view, quantities vary, not because prices vary, but because they do not.