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Is Increased Price Flexibility Stabilizing?

32 Pages Posted: 8 Jun 2004 Last revised: 12 Aug 2010

J. Bradford DeLong

University of California, Berkeley; Federal Reserve Bank of San Francisco; National Bureau of Economic Research (NBER)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: August 1985

Abstract

This paper uses Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might bell increase the cyclical variability of output in the United States.

Suggested Citation

DeLong, J. Bradford and Summers, Lawrence H., Is Increased Price Flexibility Stabilizing? (August 1985). NBER Working Paper No. w1686. Available at SSRN: https://ssrn.com/abstract=227192

James Bradford DeLong (Contact Author)

University of California, Berkeley ( email )

Department of Economics
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Berkeley, CA 94720-3880
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Federal Reserve Bank of San Francisco

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National Bureau of Economic Research (NBER)

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Lawrence H. Summers

Harvard University ( email )

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Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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