Simon Wren-Lewis: Sticky prices: How We Confuse Students, and Sometimes Ourselves: “In week one I talked about time periods in macro, and how the ‘short run’ was the length of time ‘it takes prices to fully adjust’….
[This] is at best highly misleading… the short run is the length of time it takes… monetary policy to achieve the real rate of interest implied by the RBC, or Classical, model. Calling this the time period it takes prices to fully adjust only makes sense when monetary policy involves some kind of nominal anchor…. The big danger in equating Keynesian economics with sticky prices is that students forget about the crucial role monetary policy is playing…. Yet the linking of the short run with sticky prices is ubiquitous…. Mankiw… says:
In the long run, prices are flexible and can respond to changes in supply or demand. In the short run, many prices are sticky at some predetermined level. Because prices behave differently in the short run than the long run, economic policies have different effects over different time horizons.