Is Increased Price Flexibility Stabilizing?

J. Bradford De Long, Lawrence H. Summers

NBER Working Paper No. 1686 (Also Reprint No. r0817)
Issued in 1987
NBER Program(s):   EFG   ME

This paper uses Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might bell increase the cyclical variability of output in the United States.

(315 K)

Published: DeLong, T. Bradford and Lawrence H. Summers. "Is Increased Price Flexibility Stabilizing?" American Economic Review, Vol. 76, No. 5, (December 1986),pp. 1031-1044.

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