A great deal of evidence for the U.S. economy suggests that after changes in aggregate nominal demand (1) prices move «sluggishly» toward their eventual long-term values, that (2) output responds directly to these changes in demand, and (3) these output effects linger «peristently» over time. Most econometric evidence suggests that something of the order of four to six years must pass before the ultimate effects on prices and output will be reached. As commonly interpreted, this lag has profoundly disturbing implications about the functioning of markets and about the rate of agents’ expectations in macroeconomics.

The conventional interpretation of the output-price adjustment lag -- to borrow the label suggested recently by R.J. Gordon (1982) -- comes unders the « Natural Rate Hypothesis and Gradual Adjustment of Prices » (NRH-GAP) approach. After a change in nominal demand, according to NRH-GAP, some combination of forecast inefficiency and institutional constraints on price setting prevents agents for a time from choosing the set of prices that would clear output markets at the « natural » level. In the meantime and because of this price stickiness aggregate output exhibits persistent deviations from its natural path.