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Price Dynamics and Production Lags

  • Dennis J. Snower
  • Assar Lindbeck

The paper shows how prolonged price inertia can arise in a macroeconomic system in which there are temporary price rigidities as well as production lags in the use of intermediate goods. In this context, changes in production demand - generated, say, by changes in the money supply - have long-lasting price and quantity effects. Specifically, a temporary demand shift generates "persistence" in price-quantity decisions, in the sense that the price-quantity effects of this shift persist for long after the shift has disappeared. A permanent demand shift generates "sluggishness" in price-quantity decisions, in the sense that the full price effects of the shift take a long time to appear and that meanwhile quantity effects are present.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.89.2.81
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 2 (May)
Pages: 81-88

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:2:p:81-88
Note: DOI: 10.1257/aer.89.2.81
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  1. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June.
  2. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  3. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  4. Ball, Laurence & Romer, David, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 507-24, August.
  5. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  6. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  7. Blanchard, Olivier J, 1986. "The Wage Price Spiral," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 543-65, August.
  8. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
  9. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
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