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The rigidity bias

Author

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  • Risto Herrala

    (Bank of Finland)

Abstract

We study the basic economic problem of choice between long-term and short-term commitments under a general characterization of uncertainty (aggregate uncertainty). When contingencies are contractible, a perfect market of Arrow-Debreau contingent claims implements the social optimum. When contingencies are not contractible, long-term commitments receive too much weight in individual portfolios. The economy as a whole is too rigid during periods of high aggregate shocks. The model links a rigidity bias with the operation of the price mechanism and the monetary system.

Suggested Citation

  • Risto Herrala, 2004. "The rigidity bias," Finance 0404019, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0404019
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    References listed on IDEAS

    as
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    JEL classification:

    • G0 - Financial Economics - - General
    • E0 - Macroeconomics and Monetary Economics - - General

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