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Price Flexibility and Output Stability: An Old Keynesian View


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The central macroeconomic issue is the same as ever. How reliable are automatic market adjustments in maintaining full employment equilibrium in the face of aggregate demand shocks? Many modern theorists assume that nominal prices, including wages, jump instantaneously to keep supply and demand equal in all markets. No excess supply, no involuntary unemployment, can ever arise. However, since actual price adjustments take real time, greater flexibility can be destabilizing. "Real balance" effects are overrated, and the demand effects of nominal price changes are perverse. Activist macro policies are necessary, as Keynes argued, even though nominal prices are far from rigid.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 994R.

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Length: 36 pages
Date of creation: 1991
Date of revision: Sep 1991
Publication status: Published in Journal of Economic Perspectives (Winter 1993), 7(1): 45-65
Handle: RePEc:cwl:cwldpp:994r

Note: CFP 834.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Aggregate demand; sticky prices;

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  1. A note on “awesomely destructive” fiscal policies
    by ssumner in The Money Illusion on 2013-12-14 20:03:28
  2. [経済]ニューケインジアンの5つのテーゼ
    by himaginary in himaginaryの日記 on 2013-12-26 00:00:00
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