Working Paper: NBER ID: w1686
Authors: J. Bradford DeLong; Lawrence H. Summers
Abstract: This paper uses Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might bell increase the cyclical variability of output in the United States.
Keywords: Price Flexibility; Economic Stability; Business Cycles; Wage Rigidity
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased price flexibility (D41) | increased cyclical variability of output (E32) |
| lower prices (P22) | increased output (E23) |
| expectations of falling prices (D84) | decreased output (P44) |
| increased price flexibility (D41) | increased steady-state variance of output (C32) |
| increased nominal rigidity (E31) | reduced volatility in economic activity (E32) |