Is Increased Price Flexibility Stabilizing? Redux

Saroj Bhattarai, Gauti Eggertsson and Raphael Schoenle

No 19886, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.

JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-sog
Note: ME
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Citations: View citations in EconPapers (14)

Published as Saroj Bhattarai & Gauti B. Eggertsson & Raphael Schoenle, 2018. "Is Increased Price Flexibility Stabilizing? Redux," Journal of Monetary Economics, .

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Journal Article: Is increased price flexibility stabilizing? Redux (2018)
Working Paper: Is Increased Price Flexibility Stabilizing? Redux (2012)
Working Paper: Is increased price flexibility stabilizing? Redux (2012)
Working Paper: Is Increased Price Flexibility Stabilizing? Redux (2012)
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