Price Inertia and Production Lags

Assar Lindbeck and Dennis Snower

No 959, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper shows how prolonged price inertia can arise in a macroeconomic system in which there are temporary price rigidities as well as production lags in the use of intermediate goods. In this context, changes in product demand -- generated, say, by changes in the money supply -- have long-lasting price and quantity effects. Specifically, a temporary demand shift generates `persistence' in price-quantity decisions, in the sense that the price-quantity effects of this shift persist for long after the shift has disappeared. A permanent demand shift generates `sluggishness' in price-quantity decisions, in the sense that the full price effects of the shift take a long time to appear and that meanwhile quantity effects are present.

Keywords: New Keynesian Economics; Price Inertia; Price Rigidities; Production Lags (search for similar items in EconPapers)
JEL-codes: D1 D43 D57 E12 E31 E32 (search for similar items in EconPapers)
Date: 1994-07
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Citations: View citations in EconPapers (2)

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Working Paper: Price Inertia and Production Lags (1992)
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