Working Paper: CEPR ID: DP959
Authors: Assar Lindbeck; Dennis J. Snower
Abstract: The paper shows how prolonged price inertia can arise in a macroeconomic system in which there are temporary price rigidities as well as production lags in the use of intermediate goods. In this context, changes in product demand -- generated, say, by changes in the money supply -- have long-lasting price and quantity effects. Specifically, a temporary demand shift generates `persistence' in price-quantity decisions, in the sense that the price-quantity effects of this shift persist for long after the shift has disappeared. A permanent demand shift generates `sluggishness' in price-quantity decisions, in the sense that the full price effects of the shift take a long time to appear and that meanwhile quantity effects are present.
Keywords: price rigidities; price inertia; production lags; New Keynesian economics
JEL Codes: D1; D43; D57; E12; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated fall in demand (E41) | sticky final good prices (D41) |
| sticky final good prices (D41) | sticky nominal wages (J31) |
| sticky nominal wages (J31) | sticky intermediate good prices (D41) |
| unanticipated fall in demand (E41) | sticky intermediate good prices (D41) |
| temporary price precommitment (D49) | price sluggishness (P22) |
| temporary price precommitment (D49) | positive output responses to permanent demand shifts (D59) |