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Classical theories predict rapid price adjustments, which are observed in inflationary episodes; Keynesian theories of sticky prices predict sluggish price responses, which are observed in contractions. We attempt to reconcile these observations in a model with asymmetries in producer price and output adjustments. Analysis of SIC two‐digit industry data indicates production frequently exhibits negative asymmetry‐shortfalls from trend are larger than positive deviations‐whereas price often displays positive avmmetry. Evidence supporting two rational motives for asymmetric pricing is presented, but causal interactions between output and price asymmetries are not resolved. (JEL E3)
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Tinsley et al. (1997) studied this question.
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