Price Dynamics and Production Lags

Assar Lindbeck and Dennis J. Snower ()
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Dennis J. Snower: Hertie School of Governance

No 33, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper provides a new explanation of why inflation is sluggish in response to aggregate demand shocks and why aggregate output changes as result of such shocks. We argue that these phenomena are related to lags between inputs and outputs in the production process, "production lags" for short. The broad intuition is that production activities in a modern economy are interconnected through complex input-output relations, with production lags within individual firms, and that it takes considerable time for cost and price changes to penetrate the entire input-output system. Our analysis provides a rationale for a prolonged inverse relation between inflation and unemployment. The paper suggests that the interaction of inflation persistence and unemployment persistence may offer a possible explanation of high and prolonged European unemployment.

Keywords: demand mangagement; supply-side policy; monetary policy; price dynamics; inflation unemployment; persistence (search for similar items in EconPapers)
JEL-codes: E12 E23 E24 E31 E32 E52 (search for similar items in EconPapers)
Pages: 14 pages
Date: 1999-02
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Citations: View citations in EconPapers (10)

Published - published in: American Economic Review, 1999, 89 (2), 81-88

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Related works:
Journal Article: Price Dynamics and Production Lags (1999)
Working Paper: Price Dynamics and Production Lags (1996)
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