The (Mis)Behaviour of the Aggregate Price Level

Daniel Tsiddon ()

Review of Economic Studies, 1993, vol. 60, issue 4, pages 889-902

Abstract: This paper investigates the response of the price level to random monetary shocks through a model of the fixed cost of changing a nominal price. It shows that, in an inflationary environment, an expansionary monetary shock is accommodated faster than a contractionary monetary shock. Furthermore, when the average rate of monetary expansion increases, the lag in response to a positive shock decreases. The study also proves that the relationship between the expected rate of inflation and the variance of real prices is positive only above a critical level of expected inflation. Copyright 1993 by The Review of Economic Studies Limited.

Date: 1993
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