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The rigidity bias

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  • Herrala, Risto

Abstract

We study the basic economic problem of choice between long-term and short-term commitments under a general characterization of uncertainty (aggregate uncertainty).When contingencies are contractible, a perfect market of Arrow-Debreau contingent claims implements the social optimum.When contingencies are not contractible, long-term commitments receive too much weight in individual portfolios.The economy as a whole is too rigid during periods of high aggregate shocks.The model links a rigidity bias with the operation of the price mechanism and the monetary system.

Suggested Citation

  • Herrala, Risto, 2003. "The rigidity bias," Bank of Finland Research Discussion Papers 31/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_031
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    References listed on IDEAS

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    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
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    More about this item

    Keywords

    liquidity; central banking; monetary system;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • E0 - Macroeconomics and Monetary Economics - - General

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