The rigidity bias

Risto Herrala
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Risto Herrala: Bank of Finland

Finance from EconWPA

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.

Keywords: liquidity; central banking; monetary system (search for similar items in EconPapers)
JEL-codes: G0 E0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-reg
Date: 2004-04-27
Note: Type of Document - pdf
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0404019

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