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Nominal Rigidities, Supply Shocks and Economic Stability

Author

Listed:
  • Guido Ascari

    () (Department of Economics and Management, University of Pavia)

  • Alessandro Flamini

    () (Department of Economics and Management, University of Pavia)

  • Lorenza Rossi

    () (Department of Economics and Management, University of Pavia)

Abstract

This paper shows that nominal rigidities in terms of price stickiness acts as a powerful supply-shock filter that reduces the overall economic instability. Considering a range of admissable values for price stickiness, the volatility of inflation, output and interest rate induced by technology or cost-push shocks can vary up to 50%. The paper suggests a word of caution for policies designed to increase price flexibility which would expose the economy to more economic instability in presence of supply shocks.

Suggested Citation

  • Guido Ascari & Alessandro Flamini & Lorenza Rossi, 2012. "Nominal Rigidities, Supply Shocks and Economic Stability," DEM Working Papers Series 024, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:024
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    File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0024.pdf
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    More about this item

    Keywords

    Price stickiness; economic stability; supply shock; technology shock; cost-push shock.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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