1999 Articles

Toward a General Theory of Wage and Price Rigidities and Economic Fluctuations

Stiglitz, Joseph E.

This article begins with the hypothesis that large economic fluctuations--the marked changes in the unemployment rate that characterize market economies--are a consequence of problems of adjustment to disturbances, especially adjustments of wages and prices. The article argues that because different prices (including prices of labor and capital) are determined in different ways, shocks lead to marked changes in relative prices, and those disturbances in relative prices greatly exacerbate economic fluctuations. The author looks closely at the price-setting process, providing further insights into why prices exhibit rigidities and why different prices may adjust at different rates. He then explores the consequences of asymmetric price responses.