The rigidity bias

Risto Herrala

No 31/2003, Bank of Finland Research Discussion Papers from Bank of Finland

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: E0 G0 (search for similar items in EconPapers)
Date: 2003
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