The (Mis)Behaviour of the Aggregate Price Level

Daniel Tsiddon

The Review of Economic Studies, 1993, vol. 60, issue 4, 889-902

Abstract: This paper investigates the response of the price level to random monetary shocks through a model of the fixed cost of changing a nominal price. It shows that in an inflationary environment, an expansionary monetary shock is accommodated faster than a contractionary monetary shock. Furthermore, when the average rate of monetary expansion increases, the lag in response to a positive shock decreases. The study also proves that the relationship between the expected rate of inflation and the variance of real prices is positive only above a critical level of expected inflation.

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:60:y:1993:i:4:p:889-902.

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