Price Flexibility and Output « Persistence » in the Postwar U.S.

In this paper I propose and estimate a model of output and price adjustment which explicitly parameterizes both supply-side persistence and NRH-GAP price-stickness. The model is designed to incorporate general patterns of both phenomena and to reveal their relative importance. The rational expectations-neutrality and NRH-GAP approaches appear as limiting cases. The model is very similar in principle to the one employed recently by Gordon (1982). However, Gordon’s empirical application of the model and resulting estimates appear to support NRH-GAP to the extreme and could hardly be different from the results of this paper (a matter to be reviewed in section VI).