Is Increased Price Flexibility Stabilizing? Comment

It is widely held that output in the US has been more stable since World War II than it was before World War I. De Long and Summers (1986) assert that decreased flexibility of prices explains the increased output stability. Using a contracting model that contains De Long and Summers' model as a...

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Bibliographic Details
Published in:The American economic review 1988-03, Vol.78 (1), p.267-272
Main Author: King, Stephen R.
Format: Article
Language:English
Subjects:
Demand shocks
Economic models
Economic theory
Economics
Elasticity of demand
Flexibility
GNP
Gross National Product
History
Mathematical analysis
Monetary theory
Money demand
Parametric models
Price flexibility
Price levels
Price stabilization
Prices
Productivity
Rational expectations
Studies
Supply
Supply shocks
World War I
World War II
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Summary:It is widely held that output in the US has been more stable since World War II than it was before World War I. De Long and Summers (1986) assert that decreased flexibility of prices explains the increased output stability. Using a contracting model that contains De Long and Summers' model as a special case, it is shown that an increase in flexibility of prices is unambiguously stabilizing in response to supply shocks and also will be stabilizing in response to demand shocks, unless the proportion of wages and prices determined under contract is very high. Both types of price flexibility are stabilizing if the monetary authority targets either actual or expected nominal gross national product. With King's approach, the channel through which price flexibility might be destabilizing, i.e., the impact of anticipated price changes in real interest rates, is assumed away. King's conclusions depend on the removal by assumption of the process of price adjustment as a potential disturbing factor.
ISSN:0002-8282
1944-7981