Sticky Prices in the United States

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 justified price stickyness; namely that firms, fearing to upset their cus-tomers, attribute a cost to price changes. The rational expectations equil-ibrium of an economy with many such firms is presented, estimated with post-war 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. * Assistant Professor, Sloan School of Management, M.I.T. This paper is a revised version of Chapter IV of my Ph.D. dissertation. I am indebted to Alan Blinder, William Branson and Stephen Kealhoffer for helpful comments and suggestions. THAIS I-2-