Optimal price-level flexibility

Within a simple, but standard macroeconomic model, this paper examines optimal price-level flexibility. It is shown that if output always equals aggregate supply, then it is optimal for the price level to be completely sticky. If output always equals aggregate demand, then it is optimal for the pric...

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Bibliographic Details
Published in:Journal of macroeconomics 1988-07, Vol.10 (3), p.449-458
Main Author: Cover, James Peery
Format: Article
Language:English
Subjects:
Demand
Economic models
Flexibility
Macroeconomics
Optimal
Output
Price flexibility
Price levels
Citations: Items that this one cites
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Summary:Within a simple, but standard macroeconomic model, this paper examines optimal price-level flexibility. It is shown that if output always equals aggregate supply, then it is optimal for the price level to be completely sticky. If output always equals aggregate demand, then it is optimal for the price level to be hyperflexible. If output equals the smaller of aggregate demand and supply, then a perfectly flexible price level is optimal only if the elasticity of aggregate demand to real balances equals the elasticity of aggregate supply to unexpected prices.
ISSN:0164-0704
1873-152X
DOI:10.1016/0164-0704(88)90031-6