Is Increased Price Flexibility Stabilizing?

James Bradford De Long and Lawrence Summers
Authors registered in the RePEc Author Service: James Bradford DeLong ()

American Economic Review, 1986, vol. 76, issue 5, 1031-44

Abstract: This paper uses John Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing 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 well increase the cyclical variability of output in the United States. Copyright 1986 by American Economic Association.

Date: 1986
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