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An Old-Keynesian Note on Destabilizing Price Flexibility

  • Peter Flaschel
  • Reiner Franke

Tobin's (1975) macrodynamic model on 'recession and depression' is extended by introducing two separate adjustment rules for money wages and the price level. It turns out that sluggish prices and, under an additional assumption, also sticky wages are favourable for local stability of the long-run equilibrium, while a high degree of flexibility tends to be destabilizing. In addition, a disposition to cyclical behaviour is indicated.

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Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 12 (2000)
Issue (Month): 3 ()
Pages: 273-283

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Handle: RePEc:taf:revpoe:v:12:y:2000:i:3:p:273-283
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  1. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  2. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  3. Caballero, Ricardo J. & Engel, Eduardo M. R. A., 1993. "Microeconomic rigidities and aggregate price dynamics," European Economic Review, Elsevier, vol. 37(4), pages 697-711, May.
  4. James Tobin, 1992. "An Old Keynesian Counterattacks," Eastern Economic Journal, Eastern Economic Association, vol. 18(4), pages 387-400, Fall.
  5. Ray C. Fair, 2000. "Testing the NAIRU Model for the United States," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 64-71, February.
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