There Ain’t No Such Thing as a Sticky Price

What the paper says

This article disputes the notion, held by proponents of monetary disequilibrium theory (MDT), that sticky prices prevent markets from clearing and obstruct monetary equilibrium. A thorough understanding of the nature and implications of the Misesian plain state of rest shows that all realized prices represent a momentary equilibrium in the market-clearing sense, and that the same logic applies to the market for goods and the money relation. The article shows that Leland Yeager’s (1986) examples of symptoms of monetary disequilibrium based on sticky prices indicate not disequilibrium in the market-clearing sense, but the lack of a double coincidence of wants. The article also evaluates the sticky price mechanisms offered by George Selgin (1997)—fixed contracts, menu costs, and the reluctance to lower one’s price—and concludes that they do not pose a threat to market clearing. Using total stock and total demand analysis, the article shows that the appearance of a “sticky price” in the case of a decrease in demand for a good can be explained by an elastic portion of reservation demand. This reveals that unsold inventory represents reservation demand, not excess supply, that market supply has shifted despite the observing economist’s prior assumption of an unchanged supply curve, or both. Finally, this analysis is contrasted with the typical way sticky prices are depicted with Marshallian supply and demand curves. A proper understanding of the plain state of rest reveals that MDT proponents misdiagnose monetary disequilibrium, which implies that their policy prescriptions involving a money supply that accommodates changes in money demand (either through central bank monetary policy or fiduciary media) are not equilibrating but are instead unwarranted and distortionary.