The real world is characterized by sticky prices in the sense that prices do not respond rapidly to movements in other variables. Typically, one models this property by constructing artificial economies with frictions that prevent price flexibility. This paper constructs a model in which prices are perfectly free to move but, in equilibrium, they do not. The equilibrium mimics many of the observed features of the behavior of money, prices, interest rates, and output over the business cycle. Copyright 1991 by Royal Economic Society.
Volume (Year): 101 (1991)
Issue (Month): 409 (November)
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- Azariadis, Costas, 1981. "A Reexamination of Natural Rate Theory," American Economic Review, American Economic Association, vol. 71(5), pages 946-60, December.
- Christopher A. Sims, 1989. "Models and their uses," Discussion Paper / Institute for Empirical Macroeconomics 11, Federal Reserve Bank of Minneapolis.
- Farmer, Roger E A, 1991.
"The Lucas Critique, Policy Invariance and Multiple Equilibria,"
Review of Economic Studies,
Wiley Blackwell, vol. 58(2), pages 321-32, April.
- Roger E.A. Farmer, 1989. "The Lucas Critique Policy Invariance and Multiple Equilibria," UCLA Economics Working Papers 551, UCLA Department of Economics.
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