ABSTRACT
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 two separate analyses: on the 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.
The present chapter aims to point out the need for reconstructing macroeconomics from a realistic point of view. It argues that price downward rigidity must be a fundamental assumption in any economic model which tries to explain and predict real-world market behaviour as well as recommend economic policies.
Having adopted such an assumption, a corollary follows: for every economy, there is a natural rate of inflation. This is the rate of inflation which is caused by the necessary changes in the relative prices of that given economy.
It also claims that Keynesian macroeconomics has to be the point of departure for a realistic reconstruction of macroeconomic theory. Finally, it maintains that price downward rigidity fits the Keynesian model perfectly well.
