Is increased price flexibility stabilizing? Redux

Saroj Bhattarai, Gauti Eggertsson and Raphael Schoenle

Journal of Monetary Economics, 2018, vol. 100, issue C, 66-82

Abstract: What are the implications of increased price flexibility on output volatility? In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. Our results extend to a model with both sticky information and wages. We estimate a quantitative DSGE model using Bayesian methods and using counterfactual experiments show that our results from the simple model continue to apply.

Keywords: Increased price flexibility; Aggregate volatility; Systematic monetary policy; DSGE model; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: D58 E31 E32 E52 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Is Increased Price Flexibility Stabilizing? Redux (2014)
Working Paper: Is Increased Price Flexibility Stabilizing? Redux (2012)
Working Paper: Is increased price flexibility stabilizing? Redux (2012)
Working Paper: Is Increased Price Flexibility Stabilizing? Redux (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:100:y:2018:i:c:p:66-82

DOI: 10.1016/j.jmoneco.2018.07.006

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