TY  - JOUR
AU  - Long,J. Bradford De
AU  - Summers,Lawrence H.
TI  - Is Increased Price Flexibility Stabilizing?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1686
PY  - 1987
Y2  - 1987
UR  - http://www.nber.org/papers/w1686
L1  - http://www.nber.org/papers/w1686.pdf
N1  - Author contact info:
J. Bradford DeLong
Department of Economics
601 Evans Hall
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510/643-4027
Fax: 510/642-6615
E-Mail: delong@econ.berkeley.edu

Lawrence H. Summers
Harvard Kennedy School of Government
79 JFK Street
Cambridge, MA 02138
Tel: 617/495-9322
Fax: 617/495-0436
E-Mail: lhs@harvard.edu
AB  - 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.
ER  -