Price Stickiness in Ss Models: Basic Properties

What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? Caplin and Spulber (1987) provide a stark example where the answer is “none.” It is well known that by relaxing their limit assumptions some price stickiness is regained but, to our knowledge, there are no general results on this issue. In this paper we study the relation between the frequency of microeconomic adjustment and aggregate price flexibility in a generalized Ss setup. We show that for a wide class of Ss models, the aggregate price level is approximately three times as flexible as the frequency of microeconomic price adjustment. This rule of thumb carries over to the cyclical variation in aggregate flexibility: The degree of price flexibility varies three times as much as the frequency of microeconomic adjustment over the business cycle. We also show that in generalized Ss models, strategic complementarities reduce aggregate price flexibility for any given frequency of microeconomic price adjustment, but proportionally less so than in Calvo-type models.