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Is Increased Price Flexibility Stabilizing?

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  • J. Bradford De Long
  • Lawrence H. Summers

Abstract

This paper uses Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might bell increase the cyclical variability of output in the United States.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1686.

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Date of creation: Aug 1985
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Publication status: published as DeLong, T. Bradford and Lawrence H. Summers. "Is Increased Price Flexibility Stabilizing?" American Economic Review, Vol. 76, No. 5, (December 1986),pp. 1031-1044.
Handle: RePEc:nbr:nberwo:1686

Note: EFG ME
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  1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  2. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, American Economic Association, vol. 69(2), pages 108-13, May.
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  1. Mainstream e teorie economiche critiche. Intervista ad Emiliano Brancaccio sul suo nuovo libro “Anti-Blanchard”
    by keynesblog in Keynes Blog on 2012-07-09 08:42:16
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