Equilibrium Sticky Prices ∗

I offer a macroeconomic view of product markets that combines the desirable properties of the market-clearing models descended from the real business cycle model, on the one hand, and the sticky-price disequilibrium model of modern inflation analysis, on the other hand. I adhere strictly to the basic concept of equilibrium, in that buyers and sellers never transact in my model under conditions that could be improved through bilateral action. No transactors are prisoners of a sticky price that results in bilateral inefficiency. But I adopt the sticky-price view that transactions do occur at stale prices. I show that the equilibrium set for prices (and wages) is big enough under a reasonable calibration to include a wide range of stale prices. I show that many of the propositions about central-bank policy for controlling product prices from the established sticky-price models carry over to this view. A innovation in this model is an analysis of the effects of alternative policy regimes in amplifying disturbances in the product market as they reduce the effects in the labor market. When policy narrows the profit margin in retailing in order to sustain incentives for job creation when productivity is weak, the product market moves toward shortages, in a way made coherent in the model. ∗This paper is part of the Economic Fluctuations and Growth program of the National Bureau of Economic Research. I am grateful to members of the program’s RSW group for comments. Data and programs will be available at stanford.edu/∼rehall.