Inflexible Relative Prices and Price Level Inertia

36 Pages Posted: 28 May 2004 Last revised: 22 Aug 2010

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Date Written: June 1983

Abstract

A decrease in aggregate demand at given prices and wages decreases output and employment. The decrease in employment exerts downward pressure on real wages. The decrease in production exerts downward pressure on markups. With perfectly synchronized price and wage decisions, nominal wages and prices decrease instantaneously until equilibrium is reestablished at a lower price level and the initial relative prices. If, however, price and wage decisions are a synchronized, this process can not take place instantaneously but rather takes place over time. If real wages and markups are rather insensitive to shifts in demand, the process of adjustmentis slow, the effects of money on output are strong and lasting.The paper formalizes this intuitive argument and characterizes the implications of asynchronization for the joint behavior of relative and nominal prices.

Suggested Citation

Blanchard, Olivier J., Inflexible Relative Prices and Price Level Inertia (June 1983). NBER Working Paper No. w1147. Available at SSRN: https://ssrn.com/abstract=305532

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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