The Impact of Price Rigidities: a computable general equilibrium analysis

Mathias Dewatripont and Sherman Robinson

Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: This paper uses a computable general equilibrium model of Turkey to explore the empirical effect on adjustment to various macroeconomic shocks of a variety of "structuralist" rigidities. Four types of rigidities are considered: exchange rate rigidity leading to premium rationing and rent seeking, wage rigidities leading to unemployment or labor scarcity, investment-savings imbalance leading to rationing of private consumption--forced saving--or to overall Keynesian unemployment, and sectorial price rigidity leading to consumption or supply rationing. In a series of comparative statics experiments, we explore the impact of, and interactions among, these different types of rigidities. In general, the results indicate that interaction effects are very important, especially between the macro closure rule, which specifies how investment-savings balance is achieved, and the other rigidities. Price rigidities are most damaging when a shock necessitates large relative price changes in a Walrasian world. Also, price rigidities are much more harmful when they lead to situations of excess supply rather than excess demand.

Keywords: Social and Behavioral Sciences; economics; equilibrium; macroeconomics (search for similar items in EconPapers)
Date: 1985-07-01
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