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Has anyone calculated or theorized about how long it takes prices to come to some kind of equilibrium after a market shock has happened? How has this changed over time?

An example might be a spike in the price of oil. If oil independently spikes from 50 dollars/barrel to 100 dollars/barrel in a day, how long will it take prices (food prices, car prices, wages, etc) to find equilibrium again?

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    $\begingroup$ I think it would depend on the substitutability for the commodity/service that is facing the shock. It would also depend on how important it is in the production process for instance. $\endgroup$
    – ChinG
    Nov 3, 2015 at 21:39
  • $\begingroup$ Actually, I wouldn't think those things should matter at all in how long it takes to propagate, just in the magnitude of the effects as it propagates. But I don't really know. $\endgroup$
    – B T
    Nov 3, 2015 at 22:29
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    $\begingroup$ Narrowly, yes. There does not appear to be any general answer to how long any given shock takes to affect other variables, but for many specific types of shock (like an oil price shock), there are bunches of papers estimating this sort of thing. Look into impulse-response functions in economics, which are usually estimated using vector autoregressions. $\endgroup$
    – dismalscience
    Nov 4, 2015 at 2:24
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    $\begingroup$ While dismalscience already hinted you in the right direction from an empirical standpoint, here the theoretical side. In standard neoclassical models, the new equilibrium is reached immediately. You therefore want to focus your search on models with sticky prices/wages or models with some other type of adjustment costs, e.g. costly capital adjustments. $\endgroup$
    – HRSE
    Nov 4, 2015 at 7:36
  • $\begingroup$ The right way to do this is with something like the "billion prices" project at MIT. They constantly collect online prices of goods and services and it would be easy to measure which ones move immediately with an exchange rate change for example. $\endgroup$
    – Fix.B.
    May 5, 2016 at 0:18

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This is likely only part of the story, but I found an interesting lecture by Milton Friedman that shows a graph of the quantity of money per unit of output (likely GDP) graphed alongside a normalized consumer price index (normalized so that the index intersects with the other line in 1970).

The graphs all clearly shows changes in the consumer price index lagging about 1-3 years after discontinuities in the money supply.

https://www.youtube.com/watch?v=THAaIZmxfNA&t=11m2s

In this other graph, you can see the lag is even longer than that, at anywhere from 4 years between 2008 and 2001 to 6 years from 1985 to 1992:

enter image description here

3-4 years is probably a reasonable average estimate for how long it takes for money created by the Fed to "trickle down" to the average consumer in the form of inflation.

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  • $\begingroup$ How can we read out 4-6 years from this graph? $\endgroup$
    – user253751
    Jan 27, 2020 at 9:54

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