NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asymmetric Price Adjustment and Economic Fluctuations

Laurence Ball, N. Gregory Mankiw

NBER Working Paper No. 4089 (Also Reprint No. r1885)
Issued in June 1992
NBER Program(s):   EFG   ME

This paper considers a possible explanation for asymmetric adjustment of nominal prices. We present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. We use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation.

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Document Object Identifier (DOI): 10.3386/w4089

Published: The Economic Journal, The Journal of the Royal Economic Society, vol. 104,no. 423, March 1994, p. 247-261 citation courtesy of

 
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