Price Flexibility and Aggregate Stability: Some Evidence Contrasting Developing and Developed Countries

Magda Kandil

Canadian Journal of Economics, 1996, vol. 29, issue 2, 414-35

Abstract: This paper explores the empirical validity of theoretical channels through which price flexibility may have caused differences in the stability of output in developing and developed countries. The relation between these two variables suggests several principles. Where the size of stochastic disturbances that impinge on the economic system does not play an important role in determining the degree of price flexibility, the increased flexibility is clearly stabilizing. Developing countries generally are characterized by larger stochastic disturbances and a higher flexibility of the price level than developed countries. The larger variability of disturbances is indeed destabilizing. Further, this destabilizing effect has dominated the stabilizing effect that is associated with the increased flexibility of the price level in developing countries, and this results in a clear positive correlation between price flexibility and output variability.

Date: 1996
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