Output Fluctuations and Gradual Price Adjustment.

In many different economic environments, across historical eras and national boundaries, changes in the nominal aggregate demand for goods and services have been accompanied by only a partial response of the aggregate price level. Because prices do not carry the full burden of adjustment in the short run, quantities must by definition carry part of the load. In this sense the phenomenon of gradual price adjustment is at the heart of fluctuations in output and employment and of the related debate over activist stabilization policy to control such fluctuations. The discipline of macroeconomics has been split apart in the past decade by the emergence of two dichotomous and incompatible paradigms of price adjustment. This article reviews the leading ideas that have emerged within each of the paradigms. Neither, it appears, provides a satisfactory theoretical scheme when taken in isolation. This article concludes that an attempt to merge the more convincing elements of each is needed and some suggestions for such a merger are put forward.