Skip to main content

May/June 1995, 
Vol. 77, No. 3
Posted 1995-05-01

Information, Sticky Prices and Macroeconomic Foundations

by Allan H. Meltzer

Allan Meltzer proposes that sluggish price adjustment is necessary for monetary policy to have real effects. Meltzer’s purpose is to provide microeconomic foundations for price setting and the gradual adjustment of prices to new information. Meltzer argues that differences in information and costs associated with acquiring information explain three facts about price setting behavior: 1) that many prices are set; 2) that price setters choose to set nominal rather than real prices; and 3) that many prices change slowly over time. While not rejecting a role for menu prices, imperfect competition, relative and absolute price confusion, and aggregation in explaining sticky-price behavior, Meltzer argues that these alternative explanations are not consistent with one or more features of price data. Instead, he argues that the cost of acquiring information and the inability of individuals to fully distinguish permanent from transitory shocks provide better micro-foundations for the sluggish adjustment of nominal prices observed in the data. Meltzer argues that the now widely adopted approach to providing micro-foundations to macroeconomics, which features representative agents and complete ArrowDebreu markets, have not, and will not, prove useful. He contends that this framework provides no role for monetary disturbances. Hence, he concludes that “it is not the appropriate micro-foundation for macroeconomics. No amount of squeezing, cutting, and pasting will make it so.”





Subscribe to our newsletter


Follow us

Twitter logo Google Plus logo Facebook logo YouTube logo LinkedIn logo
Back to Top