Asymmetric Price Adjustment: The Missing Link in Keynesian Macroeconomics

In the real world, prices do not behave symmetrically. Usually, nominal wages and prices are sticky downward but a lot more flexible upward; the latter is illustrated by inflationary and hyperinflationary processes. However, most mainstream economics is built upon the assumption that nominal prices are equally flexible in both directions. This leads to quite unrealistic and erroneous predictions as far as downturn in economic activity is concerned. Given price asymmetry, it is necessary to do separate analyses: on one hand, full-employment macroeconomics (price equilibrium macroeconomics) and, on the other, the macroeconomics of recession and depression (Keynesian macroeconomics). Prices play a role in the first case, but not in the second one. The present paper aims at pointing out the need for reconstructing macroeconomics from a realistic point of view. It argues that price downward stickiness must be a fundamental assumption in any economic model which tries to explain and predict real-world market behavior as well as recommend economic policies. It also claims that Keynesian macroeconomics has to be the point of departure of a realistic reconstruction of macroeconomic theory. Finally, it maintains that price downward rigidity fits perfectly well the Keynesian model, while this does not happen with either the New Keynesian or the Post-Keynesian models.