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Is Increased Price Flexibility Stabilizing? Redux / Saroj Bhattarai, Gauti Eggertsson, Raphael Schoenle.
- Format:
- Book
- Author/Creator:
- Bhattarai, Saroj.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w19886.
- NBER working paper series no. w19886
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2014.
- Summary:
- We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.
- Notes:
- Print version record
- February 2014.
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