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Aggregation and Stabilization Policy in a Multi-Contract Economy

  • Alan S. Blinder
  • N. Gregory Mankiw

This paper presents a model of a multi-sector economy in which each sector is characterized by a different type of wage or price stickiness. The various sectors experience the same exogenous shocks and have the same money supply. The analysis shows demand shocks pose no serious problems for stabilization policy. In contrast, supply shocks force the policymaker to choose between stability in one sector and stability in another. The analysis also shows the economy cannot be usefully aggregated into a single sector model. Such an aggregation misleads the economist as to the economy's underlying structure and obscures the tradeoffs the policymaker must confront. In particular, a feedback rule chosen on the basis of an aggregate model could be better or worse than a passive policy.

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File URL: http://www.nber.org/papers/w0873.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0873.

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Date of creation: Apr 1982
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Publication status: published as Blinder, Alan S. and N. Gregory Mankiw. "Aggregation and Stabilization Policy in a Multi-Contract Economy." Journal of Monetary Economics, Vol. 13, No. 1, (January 1984), pp. 67-86.
Handle: RePEc:nbr:nberwo:0873
Note: EFG
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  1. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
  2. Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
  3. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44 National Bureau of Economic Research, Inc.
  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  5. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
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