A Near-Rational Model of the Business Cycle, with Wage and Price Inertia
Quarterly Journal of Economics
1985
This paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects. The individual loss to agents with inertial price-wage behavior is second-order in terms of the parameter describing the shock, while the effect on real economic variables is first-order. Thus, significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses.
- DOI
- 10.1093/qje/100.supplement.823
- Volume
- 100 (Supplement)
- Pages
- 823-838
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref