Working Paper: NBER ID: w2476
Authors: Laurence Ball; David Romer
Abstract: Rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks. And, by themselves, small frictions in nominal adjustment, such as costs of changing prices, create only small non-neutralities. But this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions. The paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for several specific sources of real rigidity: costs of adjusting real prices, asymmetric demand arising from imperfect information, and efficiency wages.
Keywords: Nominal Rigidities; Real Rigidities; Economic Fluctuations
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real rigidities (D43) | nominal rigidity (D10) |
| degree of real rigidity (D50) | degree of nominal rigidity (D10) |
| real rigidities + small nominal frictions (E39) | substantial nominal rigidity (D10) |
| greater real rigidity (D50) | larger welfare losses from nominal rigidity (D69) |
| nominal shocks + nominal rigidity (E39) | real effects (E65) |