American Economic Review Vol. 76 No. 5 1986
Is Increased Price Flexibility Stabilizing?
Abstract
This paper uses John Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing because of the Mundell effect. While lower prices increased output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might well increase the cyclical variability of output in the United States.
- Volume
- 76
- Issue
- 5
- Pages
- 1031-1044
- Sources
- bibtex:phds-export.bib