Is Price Flexibility De-Stabilizing? A Reconsideration

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Is Price Flexibility De-Stabilizing? A Reconsideration

Author Info

Malik, Hamza
Scarth, William

Additional information is available for the following registered author(s):

Hamza Ali Malik

Abstract

Using a New Neoclassical Synthesis model of monetary policy for a small open economy, this paper explores the impact of an increased degree of price flexibility on output volatility. Previous analysis of this question – based on the earlier generation of descriptive macro systems with model-consistent expectations – offered mixed conclusions, especially in an open economy context. We update that literature by reconsidering the issue within models that involve optimization-based behavioural equations. We find clear support for Keynes’ concern that a higher degree of price flexibility raises output volatility – but only under flexible exchange rates. We discuss the implications of our findings for current macro policy discussions in both European and other economies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 457.

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Date of creation: Jul 2005
Date of revision: Apr 2006
Handle: RePEc:pra:mprapa:457

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-12-04 (All new papers)
NEP-CBA-2006-12-04 (Central Banking)
NEP-MAC-2006-12-04 (Macroeconomics)
NEP-MON-2006-12-04 (Monetary Economics)

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Other versions:
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