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The asymmetric stabilizing effects of price flexibility: historical evidence and implications

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  • Magda Kandil

Abstract

The evidence of business cycles across a sample of industrial countries indicates asymmetry in the output and price adjustments to aggregate demand shocks in the pre- and post-war periods. Upward price flexibility is significant in moderating output fluctuations across countries in the pre- and post-war periods. Nonetheless, the effect of upward price flexibility in accelerating trend price inflation is more evident across countries in the post-war period compared to the pre-war period. The combined evidence is consistent with a steeper supply curve in the face of expansionary demand shocks that increases the stabilizing effect of upward price flexibility. In contrast, a flatter supply curve in the face of negative demand shocks has countered the stabilizing function of downward price flexibility, which appears insignificant across countries in the pre- and post-war periods. In addition, a slower demand response to price change during recessions has further reinforced the contractionary effect on output despite a large reduction in price inflation across countries in the pre-war period. Apparent differences in the implications of upward and downward price flexibility point to the importance of policy intervention to moderate output contraction during recessions and price inflation during expansions.

Suggested Citation

  • Magda Kandil, 1999. "The asymmetric stabilizing effects of price flexibility: historical evidence and implications," Applied Economics, Taylor & Francis Journals, vol. 31(7), pages 825-839.
  • Handle: RePEc:taf:applec:v:31:y:1999:i:7:p:825-839
    DOI: 10.1080/000368499323797
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    References listed on IDEAS

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    1. M.W. Butlin, 1977. "A Preliminary Annual Database 1900/01 to 1973/74," RBA Research Discussion Papers rdp7701, Reserve Bank of Australia.
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    Cited by:

    1. Kandil, Magda, 2009. "Demand-side stabilization policies: What is the evidence of their potential?," Journal of Economics and Business, Elsevier, vol. 61(3), pages 261-276.
    2. Magda Kandil, 2009. "Public Spending and the Macroeconomy: Evidence from Developing and Developed Countries," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 8(2), pages 133-158, August.
    3. Magda Kandil, 2002. "Asymmetry In Economic Fluctuations In The Us Economy: The Pre-War And The 1946-1991 Periods Compared," International Economic Journal, Taylor & Francis Journals, vol. 16(1), pages 21-42.
    4. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:1254-1273 is not listed on IDEAS
    6. Jim Granato & Melody Lo & M. C. Sunny Wong, 2007. "A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 191-197.
    7. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.

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